The disparity between the UK’s interest rate (4.5%) and the Eurozone’s (2.5%)
This can be attributed to several interrelated factors:
Below info from DeepSeek, responses from Lee Green (editor of this blog)
- **Inflation Dynamics**:
– The UK has faced persistently higher inflation, peaking at over 11% in 2022 and remaining above the Bank of England’s (BoE) 2% target (around 3-4% recently). This contrasts with the Eurozone, where inflation has eased closer to 2%. Sticky services inflation and wage growth in the UK have been key drivers, necessitating tighter monetary policy.
Debateable since we have had interest rates @1% for some years… this is a BOE excuse for holding rates excessively high.
- **Economic Growth and Labor Markets**:
– The UK labor market is tighter, with lower unemployment and stronger wage growth fueling inflationary pressures. The Eurozone, meanwhile, has seen weaker growth (e.g., Germany’s industrial slowdown) and less wage-driven inflation, allowing the ECB to prioritize economic support.
The Labor market would be improved by growth of the economy creating more jobs. Reduced interest rates would likely weaken the £ which is being kept artificially high by the BOE using high interest rates (just like a Banana republic would do).
A lower values £, even slightly, would make UK goods more competitive, thus more exports & less imports all good for the country.
- **Structural Economic Differences**:
– The UK’s economy is more services-oriented, where inflation is harder to tame, while the Eurozone has a larger manufacturing base, more sensitive to energy costs and global demand. Post-pandemic recovery and energy shocks (e.g., Ukraine war) hit Europe harder, prompting a cautious ECB approach.
By cautious the ECB has reduced rates to 2.5%, Why is the BOE not being cautious?
- **Monetary Policy Timing and Strategy**:
– The BoE adopted a more aggressive hiking cycle earlier to combat inflation, while the ECB started later from negative rates. The BoE’s “higher for longer” stance reflects concerns over persistent inflation, whereas the ECB sees faster disinflation progress.
Inflation reduced again in February, 2.8%, contrary to the BOE expectations, they got it wrong again, are they fit for purpose? Why haven’t they admitted their errors and reduced the 4.5% rate?
- **Exchange Rate and Currency Pressures**:
– The BoE may be wary of pound depreciation (which imports inflation), incentivizing higher rates to attract foreign capital. The euro has been more stable, reducing similar pressures for the ECB.
This is the crunch, the BOE are insanely trying to subsidise Sterling, by doing so they are simply killing the economy, causing poverty and defying the wishes of a democratically elected UK government.
- **Fiscal Policy Interactions**:
– UK fiscal policies (e.g., post-pandemic stimulus, energy subsidies) may have added inflationary pressures, requiring monetary tightening. Eurozone fiscal policies have been more fragmented and restrained.
No reason to have an 80% higher Bae interest rate, scandalous!
- **Housing Market Sensitivity**:
– The UK’s mortgage market, dominated by variable-rate loans, amplifies the impact of rate hikes. However, housing-driven inflation may still compel the BoE to maintain higher rates.
Well this purely puts the price of home ownership out of the reach of millions of British people, hardly the remit of a government body such as the BOE! Have we not learnt that defying market conditions leads to disaster? Ask John Major!
In summary, the BoE’s higher rates reflect a response to entrenched inflation, wage pressures, and structural economic factors, while the ECB’s lower rates accommodate weaker growth and faster disinflation in the Eurozone. Both central banks are navigating distinct economic landscapes, leading to divergent policy paths.
True the BOE walks a dangerous aggressive path leading to poverty with a 4.5% rate, the ECB is Cautious with a 2.5% rate, give me caution any day!
Solution;
Take away the right to set interest rates from the BOE or fill their rate committee with sensible economists, not civil servants, and the PM and Chancellor!