The Maradona effect: Bank of England's banking on markets to prevent rate hikes

I realise the World Cup is over and, more to the point, no-one particularly wants to hear any more about the Argentinian football team, but indulge me for a moment

Because casting your mind back to one of the most dramatic of all World Cup meetings between England and Argentina (no, not the one this year) is actually a rather helpful way of understanding what's going on in the UK economy right now.

I'm thinking, in particular, of the famous match in 1986, the one where Diego Maradona scored the famous 'hand of God' goal. You may recall that minutes after that infamous moment, the Argentinian striker proceeded to score a truly amazing goal, where he ostensibly dribbled round the entire English team before slotting the ball behind Peter Shilton.

A few years ago, the-then Bank of England governor, Mervyn King, used that goal as a sort of analogy about the way the Bank works.

Money latest: What the interest rate hold means for you

Because if you re-watch that goal, you see that far from dribbling around each England player, actually Maradona ran in a more or less straight line from the halfway line all the way into the six yard box. But since the English defenders expected him to turn one way or another, they kept missing the tackle.

His point (back now to the economics) was that the Bank could sometimes do something rather similar with monetary policy - which is to say the various different levers it uses to affect inflation, and the amount of money sloshing around in the economy.

Say the Bank was widely expected to raise or cut interest rates: well, that in and of itself might persuade investors, and the high street banks setting mortgage rates, to start raising or cutting the rates they charge customers.

And so the central bank can sometimes actually influence the prevailing interest rates households and businesses pay without (and this is the key bit) having to actually change the official interest rate. Like Maradona, they can carry on running in a straight line (eg leave rates on hold) while the market jumps in just the direction they want.

In some respects, that's precisely what's happening now. Despite the fact that the events in the Persian Gulf have pushed up oil and gas prices, the Bank has left the official UK interest rate (Bank rate, as it's formally called - or the "base rate" as others call it) on hold at 3.75%. And yet the actual mortgage rates you have to pay if you want to get or re-fix a 75% loan-to-value mortgage have gone up by 79 basis points (0.79%) since February.

Something similar goes for other loans. The market is moving without the Bank of England actually having to raise rates.

Not all that long ago, most investors expected the Bank's monetary policy committee (MPC) to raise interest rates at this late July meeting. But in the event, they didn't. Why? In part because, actually, some of the scarier forecasts about the impact of the war in the Persian Gulf did not come to pass. But in part, yes, because the 'Maradona effect' means to some extent the market has been doing the work on interest rates without them having to.

So, does this all mean the Bank actually might not need to raise rates at all? Does it mean it can soon do what it was doing not all that long ago, and reduce them? Well, not so fast.

For one thing, as the events of the past few days have shown, the situation in the Gulf is extremely combustible and unpredictable. It is entirely plausible that full blown conflict re-erupts again, which in turn would push up oil, gas and a whole load of other prices. For another, it so happens there are all sorts of other inflationary pressures filtering into the UK economy.

To pick one example from the Bank's latest monetary policy report, published today, the cost of computer memory chips has gone up at a stratospheric rate amid the AI boom.

And then there's the other problem central bankers are faced with, a problem illustrated only last night after Kevin Warsh, the new Federal Reserve chairman gave his first post-rate decision press conference.

Warsh implied, without naming Diego Maradona, that since the prevailing market interest rates had risen in the US, that might well mean America's central bank could sit on its hands, and not raise rates.

That provoked an unusually nervy jump in US Treasury yields - a sign that investors are fretting about whether the Fed's new leadership is prepared to raise rates if necessary.

In other words, the Maradona effect really only works if the player - sorry, central banker - doing it has credibility. If the market really believes it will raise interest rates if it needs to, rather than being caught behind the curve, then it might just be able to get away with it. Interest rates really might not need to rise.

But ultimately, the UK economy remains vulnerable to international factors. Higher oil and gas prices are ultimately the chief explanation for so much of the cost of living squeeze of recent years.

They are, again, the key factor that could push up prices in the coming months. The Bank calculates that even as things stand, the average household energy bill could rise from £1,660 now to £1,880 in October,

The good news is that consumer confidence and economic growth is significantly more resilient than in 2022. There is, for the time being, no shadow of recession hanging over the UK, at least according to the Bank's forecasts.

But how long that stays the case, and how long the Bank can carry on leaving rates unchanged and hope the market does its job for it, remains to be seen.

(c) Sky News 2026: The Maradona effect: Bank of England's banking on markets to prevent rate hikes