The data delusion: interest rate setters need to look at where the economy’s heading, not where it’s been

These are the main takeaways from today’s Bank of England meeting, when, as broadly expected by economists and markets, the Monetary Policy Committee turned down the opportunity to cut interest rates.

As has become the norm over the last few years, the surrounding communication is simply dripping with nuance, hesitation, qualification and all the adverbs needed to turn plain speaking into an exercise in ambiguity.

The world is an uncertain place, so it is understandable, but it is most assuredly not helpful. When it comes to central bank communication, I have long argued that less is more.

The 5-4 vote in favour of no change highlights significant division among the Monetary Policy Committee members. Again, this is not new. Voting patterns have been volatile and opinion divided for some time now.

This will be advertised as evidence that the committee is working as intended – divergent viewpoints are being aired, and policy is thus treading the middle way.

Of course, it could also be evidence of conflicting economic ideology impeding the effective setting of interest rates. Time will tell.

The Bank of England’s Governor, Andrew Bailey, stated he would prefer to wait and see if developments this year demonstrate that the easing of inflation is durable. This suggests that whether rates will be cut at December’s meeting is still very much a live question.

This is a view shared by financial markets, which are currently about 60% convinced that a cut will come at the last meeting of 2025.

Of course, what Governor Bailey’s statement also demonstrates is a classic central bank fallacy – that we can increase our certainty about an uncertain future by accumulating additional data concerning the past. If that were true, investing would be easy, and we would all be relaxing on yachts moored off St. Tropez.

It is an inconvenient truth for central bankers that the effects of their policies are felt with a significant and variable lag. That means they are required to set a course for where the economy is heading, not where it has just been.

Exactly like being an investor, this means that a balanced assessment of future probabilities is needed – and that is a judgement, never a data-driven certainty.

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James Athey is co-manager of the IFSL Marlborough Global Bond and IFSL Marlborough Global Corporate Bond funds.

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