Bank of England Bets on Market Forces to Regulate Interest Rates

The Bank of England is relying on market forces to influence interest rates, rather than making changes itself. The concept is being referred to as the 'Maradona effect', after a famous football match between England and Argentina in 1986.

In that game, Diego Maradona scored two goals, one of which was an infamous 'hand of God' goal. However, he also scored another goal by simply running in a straight line from the halfway line to the penalty box, with English defenders expecting him to turn and change direction.

The Bank of England's former governor, Mervyn King, used this analogy to describe how the central bank can influence interest rates without actually changing them. If investors expect the Bank to raise or lower rates, they may adjust their own prices accordingly, even if the official rate remains unchanged.

This 'Maradona effect' is being seen in action now, as the Bank has left interest rates on hold at 3.75%. However, mortgage rates have risen by 79 basis points (0.79%) since February, despite the Bank's decision not to raise rates.