.jpg "hero")
Global Perspectives
Britain’s Policy Cul-de-sac: How Orthodoxy Became the Enemy of Growth
The UK once again finds itself balancing on a knife edge between prudence and progress. Determined to demonstrate credibility after years of instability, policymakers risk confusing caution with competence—steering into a policy cul-de-sac where fiscal and monetary orthodoxy, however well-intentioned, have become the quiet enemies of growth.
Governor Andrew Bailey’s latest remarks in the Financial Times on 7 November underline the challenge. The Bank of England now expects to live with a neutral interest rate around 3.5% for the foreseeable future. “The path is downward,” Bailey said, “but gradual.”
In plain terms: rates may fall, but not far.
That figure—3.5%—signals more than a technical adjustment. It represents a structural shift toward a permanently higher cost of capital than in the eurozone or the United States. In an economy already burdened by high debt and weak productivity, that poses a lasting headwind to growth. Yet the instinct to act cautiously is understandable. After a decade of shocks—from Brexit to the pandemic and the mini-budget turmoil—the desire for predictability runs deep.
Two Decades of Monetary Orthodoxy
.jpg "Article image")
This story began long before today’s policymakers took office. After the UK crashed out of the Exchange Rate Mechanism in 1992, Chancellor Norman Lamont introduced explicit inflation targeting for the first time. Five years later, Gordon Brown granted the Bank of England operational independence—a bold and widely admired reform.
That framework was designed to anchor credibility in turbulent times. Yet what began as a flexible, pragmatic system has hardened into an article of faith. Over time, inflation first, growth second has become an unspoken rule—2 per cent at all times, whatever the cost.
From Lower-for-Longer to Higher-for-Longer
Following the 2008 financial crisis, the Bank slashed rates to near zero and deployed quantitative easing, convinced that ultra-loose policy would restore growth. Instead, it inflated asset prices and masked deeper weaknesses: stagnant productivity, chronic under-investment, and a distorted housing market.
When inflation surged after the pandemic, the same institution moved swiftly in the opposite direction—from “lower for longer” to “tight for as long as it takes.” Given the painful memories of past inflation, this reflex is understandable. Yet with price pressures now easing, maintaining a structurally high real rate risks dulling the very recovery policymakers seek to sustain. The challenge is not a lack of diligence, but an excess of caution—reinforced by fiscal policy that is, if anything, even more constrained.
.jpg "Article image")
Fiscal Orthodoxy Joins the Fray
Chancellor Rachel Reeves faces an equally difficult balancing act. Determined to prove fiscal discipline after years of turbulence, she has set rules requiring a balanced current budget by 2029 and falling debt within five years. These aims are sensible in principle—but in today’s low-growth, high-yield environment, the rules tighten automatically.
Reeves cannot easily cut public spending without fracturing fragile political coalitions, so the adjustment must come from higher taxes rather than reform or investment. The result is a fiscal stance that inadvertently tightens at the same time as monetary policy—a form of coordination, but in the wrong direction.
The combined effect is circular:
High interest rates dampen growth; low growth raises the fiscal burden; higher taxes suppress growth further.
It is a macroeconomic ouroboros—a cycle that devours its own potential.
.jpg "Article image")
A Nervous Outlier
This dual orthodoxy leaves Britain looking increasingly isolated among advanced economies. The United States runs a looser fiscal regime alongside a Federal Reserve with a genuine dual mandate. The eurozone, for all its complexity, explicitly recognises the trade-off between inflation control and employment.
Britain, by contrast, now offers a policy mix of elevated real rates, tight fiscal rules, and hesitant growth—understandable given recent instability, yet self-limiting. What looks like prudence on paper risks becoming stagnation in practice.
A Canadian Clue: The Path to Balance
There are models that preserve discipline while restoring flexibility. Canada’s framework combines a 2 per cent inflation target with a joint five-year agreement between government and central bank. The target sits at the midpoint of a 1–3 per cent band and is explicitly tied to employment outcomes. It is independent, but accountable; credible, yet capable of adaptation.
Adopting a similar approach in the UK would not mean abandoning inflation discipline. It would simply reassert that price stability is a means, not an end.
A UK “Monetary Policy Agreement” could keep the 2% target as an anchor, while allowing the Monetary Policy Committee to accept a slower path of disinflation in the short term to support investment, employment, and productivity—without sacrificing long-term credibility.
.jpg "Article image")
Why IFCs Should Care
For Britain’s international finance centres—and the City—these choices matter deeply. A high neutral rate suppresses asset valuations, curbs credit appetite, and nudges investors toward lower-rate jurisdictions. IFCs may benefit from volatility in the short term, but they thrive on sustained growth over the long run.
A balanced, growth-friendly policy framework would strengthen Britain’s position as a global financial hub, signalling to investors that stability and ambition can coexist.
Time for Balance, Not Bravado
Governor Bailey’s caution and Chancellor Reeves’s fiscal discipline are understandable responses to the turbulence of recent years. Yet if both continue to err on the side of restraint, Britain risks mistaking stability for stagnation.
The task ahead is not to abandon orthodoxy, but to renew it—to rediscover the pragmatic balance that once defined British economic leadership.
Only by acknowledging both sides of the ledger—inflation and growth, stability and dynamism—can the UK escape its policy cul-de-sac and restart the engine of prosperity.
About our Blog
Global Perspectives provides regular, on-point commentary on relevant topics in a pithy and accessible way. Our observations and points of view are based on listening hard to clients global needs, priorities and concerns. We draw on insights from every area of our business and collaborate to deliver this global thinking; something that clients tell us is distinctive and sets us apart. If you'd like to find out more, please get in touch.
View our previous posts here.
Contact
About Mourant
Mourant is a law firm-led, professional services business with over 60 years' experience in the financial services sector. We advise on the laws of the British Virgin Islands, the Cayman Islands, Guernsey, Jersey and Luxembourg and provide specialist entity management, governance, regulatory and consulting services.
