It is unlikely that the Bank of England will change interest rates when its Monetary Policy Committee meets this Thursday.
Inflation has remained higher than hoped and it would be controversial to cut the rate while the election campaign is building to its climax.
Rishi Sunak was criticised by former Bank of England economists last month for “utterly irresponsible” and “nonsense” comments suggesting a vote for the Conservatives at the general election is a vote to cut interest rates. That was because the Bank – not politicians – has set interest rates for more than 25 years.
But a new analysis shows that when politicians were in charge of it, the bank rate was higher under the Conservatives than under Labour.
The Bank had the job of setting rates since Labour came to power in May 1997. Prior to that, the chancellor did it. Then chancellor Gordon Brown gave the job to the Bank after using the power just once to raise rates from the 5.94 per cent he inherited to 6.25 per cent.
At the time, it was hailed by Tony Blair as “the biggest decision in economic policy-making since the war”.
So why did the government change how interest rates are decided and when has it been highest?
The history of interest rates
A new analysis of the bank rate – under its various names – shows that since the Bank opened in 1694 the average rate has been 4.65 per cent leaving the current 5.25 per cent rate, set last August, only slightly higher than its historical mean.
To work out the average bank rate, the rate on each day must be added up and divided by the total number of days of which there have been 120,400 since the Bank opened with a rate of 6 per cent in October 1694 when William III was on the throne.
There have since been 847 changes to the rates. Within a couple of months of opening in 1694, it slashed it to 4.5 per cent and a few months later to 3 per cent before rising to 4.5 per cent in 1699, averaging 3.41 per cent in those six years.
After that the rate only changed twice in the entire 18th century, and then hovered between 4 per cent, 5 per cent, and 6 per cent until 1844 when it fell to 2.5 per cent. Following that, it moved dramatically, peaking at 10 per cent in 1857 and 1866 and falling to 2 per cent on 17 occasions before 1899.
The daily tables show that economists and politicians were finding their way if not experimenting.
However, their interventions were nothing compared with politicians in the mid-20th century. Weekly, sometimes daily, changes were made, occasionally in opposite directions. In the five days from 18 January, 1982, rates went from 14.31 per cent to 13.88 per cent, spreading a half point cut over a working week.
In May 1989 a rate of 13.75 per cent was increased to 13.88 per cent in September of the same year, only to be cut again to 13.75 per cent three days later.
The change to give the Bank of England control
It was partly to stop this nano-management that Gordon Brown decided to hand the job over to the professionals at the Bank of England where rates and changes were put back to even quarters of 1 per cent.
As the global financial crisis drew to an end in 2009, the Bank had cut interest rates to 0.5 per cent which was then the lowest in its history, until the Covid crisis brought a further cut to 0.1 per cent where it stayed from March 2020 to the end of 2021.
My analysis of the six party eras between the end of the Second World War and Brown giving up the right to set rates shows that they were lower under Labour chancellors than under Conservatives.
Over that whole time from 26 July, 1945 to 1 May, 1997 the average rate under Labour was 6.19 per cent, but 7.93 per cent when a Conservative was in charge. Only Margaret Thatcher’s regime – with a rate of 10.43 per cent – managed to sneak below the 10.5 per cent average of Labour’s Wilson/Callaghan government by just 0.07 per cent.
Even over the whole era from 1945 to today the average bank rate under Labour Ccancellors has been lower by 0.39 per cent than under Conservatives – and that includes the post-1997 era when leaders such as David Cameron, Theresa May and Rishi Sunak have enjoyed rates averaging 0.96 per cent compared with Blair and Brown’s 4.65 per cent.
The Bank of England is often criticised over interest rates. But compared to the vacillating incompetence of politicians over the years prior to 1997, the Bank gets my vote for being in charge.
What is the ‘bank rate’ and what does it do?
The bank rate is set by the Bank of England’s Monetary Policy Committee made up of nine people. It’s part of the action it takes to meet the target that the government sets the Bank to keep inflation low. The current target of inflation is 2 per cent.
The bank rate, also known as the base rate or interest rate, is what the Bank charges other banks and lenders when they borrow money.
It influences the interest rates that many lenders charge for mortgages, loans and other types of credit they offer people.
If the rate changes, then normally banks change their interest rates on saving and borrowing. This can go up or down.
For example, with rates at 5.25 per cent currently, savers are getting better deals on their savings accounts but those with variable mortgages, which are influenced by the base rate, will see their costs go up.
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