I have published this video this morning. In it I argue that the Bank of England is signalling we're going to have high interest rates for a long time because it thinks we are still at risk of suffering inflation. But that's absurd. The Bank of England is now the biggest creator of inflationary pressure in our economy.
The audio version of this video is here:
The transcript is:
The Bank of England says it's still worried about the rate of inflation in the UK economy, and no doubt it will be fretting enormously over the fact that Rachel Reeves has now given pay rises to several million people working in the NHS and education. But the truth is, the biggest fueler of inflation in the UK right now is The Bank of England.
Why is that? Well, it's because the Bank of England is keeping interest rates very high. They are at present 5. 25 per cent and we're not expecting them to change over the rest of this year to any great extent - many are suggesting a cut of 0. 5 per cent in the rest of this year. So, the Bank of England is going to keep interest rates at way above the rate of inflation, and that is having a massive impact on the economy.
Why? Well, many prices are heavily influenced by that interest rate. Rents are, for example. We know that rents are running at inflation rates of more than 7 per cent on average in the UK at present, and higher in some places. And that is enough to fuel inflation.
Of course, the Bank of England is also keeping mortgage rates higher. And every month, more and more people are being forced onto new, higher rate mortgage deals. And that is increasing the pressure on wage increases because people can't make ends meet. So of course they want a wage rise as a consequence. Therefore, the Bank of England is also fueling that.
And it's fueling other increases as well. For example, the price of cars on leases goes up when interest rates are high. The price of many other products is related to the interest rate implicit within them. If you pay for something on some form of rental agreement or on a deferred interest payment, or you simply have a high loan balance and that is remaining at a very high level, you're going to be pushing for a wage rise to cover those costs as well.
The simple fact is that if we had lower interest rates, we would have a reduced pressure on wages in the UK.
We'd have a smaller cost of living crisis.
We would have lower rates of inflation.
But the Bank of England is insisting that it has to keep interest rates high.
I can only say that it's doing that because it wants to fuel the increase in the wealth of those who are holding bank balances, because I can't find any other explanation for it. It most certainly is not controlling inflation by its actions. In fact, it's doing the exact opposite.
So why are we letting it get away with this?
And why is Rachel Reeves letting them get away with this when she could interfere? I genuinely don't know.
We have a Bank that has been given a mandate of reducing inflation to 2 per cent and inflation is at 2 per cent and yet it is insisting on inflicting further pain on our economy which will reduce economic activity in direct contrast to what our Chancellor of the Exchequer, wants and it is creating pressure on pay rises which is what it says it does not want.
The consequence is that it will eventually force unemployment up. That seems to be what the Bank of England wants, as if recession is its goal. That's a very weird economic policy. But, everything says that that's what it wants.
Are they really that masochistic that they want to punish us for what happened in the last couple of years, none of which was our fault because all the causes of inflation were external to the UK?
It seems so, and in which case, I've got one thing to say. The Bank of England's independence has to go because these people can't be trusted.
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Rates should be lower. Real (ie inflation adjusted ) interest rates at 3% which is way too tight.
Is this a deliberate policy to transfer money to the wealthy? Probably not. More likely it represents wrong models, a tool kit that contains just one tool and narrow minds.
Three thoughts.
1) High rates DO work… but the phrase that always comes to mind is “The operation was a success but the patient died”. The work by impoverishing people who can no longer buy what they need forcing suppliers to drop their prices (and in turn being impoverished themselves). So, they do work but at a huge cost.
2) Do high rates fuel inflation? To be honest, we don’t really know the extent of this. Theoretical models need to be calibrated to real life and the last time we had an inflationary burst like we have just seen was a long time ago and our economy is completely different. We need to get out and observe, survey and just think. Only then might we get the right policy. For this to happen we need real diversity of thought on the MPC…. which means broader representation on non-bankers/economists.
3) For me, price gouging by (near) monopoly suppliers is, perhaps the main cause of inflation. Eg. Wholesale electricity prices are now at levels about 20% or 30% above the average rates prevailing for a decade before the war in Ukraine; my standing charge is up 100% and my per unit amount is up about 60%. Or, another way – once upon a time the Ofgem Cap was just there to protect those that did not “shop around” from getting completely gouged – now it has become the standard rate (ok, that is starting to change but not much). We also talk in % which is dangerous. If wholesale prices rise from 100 to 130 (ie 30%) and retail from 200 to 260 (ie 30%) the profit has not merely been preserved it has grown by 30%…. and at a time everyone else is suffering. Now, the neoliberals sit comfortably and tell us “don’t worry, competition will sort that out” – but it hasn’t and it won’t.
If killing the patient causes business to lower prices, and they don’t go out of business, then No 3 is the cause of inflation, price gouging. Which raises the question could inflation be controlled not by raising interest rates, which of itself may have no effect in bringing down inflation, but by preventing price rises?
The UK and US used to have price controls, but of course that’s heresy to neoliberals who ensured the policy was dumped (eg by Reagan) and made the very idea seem an outrageous attack on freedom (to price gouge).
Maybe we need some new thinking. Causing unemployment is sociopathy.
You are right to point out this most brazen of policies by the elite whose profits finds itself put back into the political coffers that enabled people like Reeves to get where she is now in the first place. and retain the status quo.
You could almost call it a ‘ political party funding scheme’ as far as I am concerned.
This is why political party funding needs to be nationalised in my view. It would sever behaviour like this – along of course with sweeping out the corrupt people in the BoE as you suggest. And yes, I did say ‘corrupt’.
A renewable project. Most of the savings (supplying RES elec to a customer) are sucked up by finance costs (the counterparty i.e. the one buying the elec, is such that we can get close to base-rate financing). Thus it is not just inflation that the unelected-overpaid-inbeciles in the BoE are causing, but they are also slowing down the roll out of renewables.
There is a democratic issue at stake here – that those elected have to have their hands on the levers of power. The cost of money is one such lever & it cannot be in the hands of unelected-overpaid-inbeciles – who are accountable to nobody. The puzzle is that the problem is never characterised as such.
Oddly, a similar situation (democratic oversight) is playing out with the enquiry into the plods and their antics penetrating (in a whole variety of ways) more than 1,000 political groups between 1968 and 2010 (involving 139 undercover plods). One of the subversive groups was…. some mothers wanting better child care.
Who made the decisions whether a group was subversive (who makes the decision on inflation? & on what basis). Who justifies the use of resource (who justifies the impact on the economy) responsbility?. In both cases……….. what happens in the event of failure?
Echoing Benn: how do we get rid of them? Short of a revolution, tumbrils etc, it would seem impossible.
You observe that in the real world high interest rates are delaying the roll out of much needed investment in renewable energy…. but “this a feature, not a bug” of interest rate policy. All the commentators talk in bland terms about “high rates are needed to control inflation”; in the next breath they say “we need more investment in the UK”. If it weren’t so serious it would be a joke!
Agreed
Firstly I agree with what you say.
There was an interesting comment on here a while ago that the Russian & Chinese Central Banks looked closely at the economy and could identify ‘inflationary pressures’ the suggestion I thing was that they were looking out for ‘excess profits’
Now the suggestion is, and with some justification that margins on Petrol & Diesel are significantly greater than a year or so ago, and I cant imagine that there are not other areas where similar things are happening – Housing just dont get me started.
So where is action being taken to stop profiteering? The threat of it alone would I suggest would have an impact on prices in many sectors and reduce inflation more effectively than raising interest rates.
Rachel Reeves has a “blackhole” like her boss it’s called corruption! You can call it intellectual corruption if you want but how can you have the experience of an Oxford PPE, an LSE MSC, and work for the Bank of England and not be curious how the monetary system really works especially after Keynes made clear “anything we can actually do we can afford”? Did none of her teachers/mentors ever explain what Keynes meant? What kind of country is this they couldn’t? The words “moronic” or “corrupt” springs to mind!
You make fair points Mr Schofield.
Part of the problem is that – apart from punch & judy stuff in the HoC, Reeves (and the assorted hangers on that surround her) are never cross-examined, publicly, forensically.
Their magical thinking, the trite meaningless phrases they use, are never taken apart.
The reason for this is that, should this happen, the bedroom farce that is “UK democracy” (enjoying a much longer run than the Mousetrap) would be exposed for what it is: a bunch of placemen, following orders & in turn illustrative of a failing society manipulated by a power clique – pulling Reeves (& other placemen’s strings).
And whilst interest rates remain high, the banks keep cashing in:
https://www.ft.com/content/3cdf0ffa-b46e-459b-b11e-1ccd47c97f11
https://www.ft.com/content/c2f52b41-1aba-459f-b911-e68d85fd1d08#post-b91b2fa7-e735-440c-9817-bbf78d4f9170