Market News

BY  Phillip Inman

The Bank of England should use its meeting next month to cut interest rates by at least half a percentage point to 4% in response to the financial turmoil created by Donald Trump’s trade tariffs, the former deputy governor Charlie Bean has said.

He believes an aggressive strategy is needed to combat the fallout from Trump’s tariff war, which has knocked trillions of pounds off global stock markets, undermining business and consumer confidence.

Bean, who was also the chief economist of the government independent forecaster, the Office for Budget Responsibility (OBR), said uncertainty over the next few weeks would force businesses to delay investments and hit consumer spending.

He said that until Trump’s “liberation day” tariff plan was announced, he was a longstanding interest rate hawk who supported high interest rates, but he said the “crazy situation” in the US would have profound effects on the UK, forcing the central bank to cut rates by more than expected.

Another former Bank rate setter, David Blanchflower, said Bean’s intervention went a long way to recognising the significance of the economic shock, but Threadneedle Street should hold an emergency meeting before the next scheduled meeting on 8 May to consider a deep reduction in the cost of borrowing.

Blanchflower, who as a member of the Bank’s monetary policy committee campaigned against interest rate rises before the 2008 banking crash, urged the Bank to move quickly to bolster confidence and prevent an economic downturn.

“You need to really care about consumer confidence because when it falls you are staring at a recession,” he said.

Financial markets have priced in a 0.25 percentage point cut to 4.25% in May and two more cuts of the same size this year, reducing UK interest rates to 3.75%.

The OBR forecasted last month that a similar global trade dispute would reduce the UK’s national income by 1%, lengthening a 12-month period of stagnation by another year.

Trump has imposed a minimum 10% tariff on imports from all countries that trade with the US and more onerous charges on a range of countries from the EU (20%) to China (34%).

Speaking to the Guardian, Bean said: “It is not just the tariffs that are the problem, it is the huge uncertainty these actions have created, delaying buying and investment decision by businesses and consumers.”

Explaining why a much bigger cut was needed than financial markets expect, Bean said: “In November 2008, the markets expected a 0.25 percentage point cut, or maybe a half a per cent.

“But we were talking to our agents in the regions and they said business orders had fallen off a cliff. It was obviously a very serious situation.

“We surprised everyone with a cut of 1.5 percentage points. It was huge and it needed to be.

“The tariff situation is not of the same magnitude but this is a disinflationary shock and an event that the bank should react to, and react very strongly.”

The threat of a financial accident was also heightened, he said, as companies adjusted to the impact of trade tariffs.

The collapse of a financial institution or hedge fund in the US could trigger a broader panic in the way the LDI pension scheme panic forced the Bank of England to intervene in the wake of Liz Truss’s mini-budget.