Bank of England's Credibility Test: Can Maradona Effect Sustain Rate Hikes?

The Bank of England's decision to keep interest rates on hold at 3.75% has been seen as an example of the 'Maradona effect' in action.

This phenomenon, first described by former Bank governor Mervyn King, refers to the way the central bank can influence market interest rates without actually changing the official rate.

The analogy is taken from Diego Maradona's infamous goal in a 1986 World Cup match against England, where he appeared to dribble around the entire team before scoring. However, it was later revealed that Maradona had actually run in a straight line, with the English defenders expecting him to turn and therefore missing the tackle.

In this context, the Bank of England can create an expectation that interest rates will rise or fall without actually changing them, causing market participants to adjust their behavior accordingly. This has been seen as one reason why mortgage rates have increased by 79 basis points since February despite no change in the official rate.

However, not everyone is convinced that this approach is sufficient. Some economists warn that the situation in the Persian Gulf remains volatile and could push up oil prices, which would necessitate a rate hike to keep inflation under control. Moreover, the Bank's credibility depends on its ability to raise rates if necessary, something that has been questioned by some observers.