The Governor of the Bank of England, Andrew Bailey, gave a speech yesterday. It was intended to set out his view on the future direction of monetary policy. In it he said that:
The great strength of the MPC process is that nine reasonable and I would say well informed people can differ on these interpretations, and we do so transparently. But, all of us believe that there will need to be some modest tightening of policy to be consistent with meeting the inflation target sustainably over the medium-term. Recent evidence appears to have strengthened that case, but there remain substantial uncertainties and we are monitoring the situation closely.
This comment was offered in this context:
[A]ll of this group [who favour waiting to see what happens with labour markets] were of the view that the stimulus to monetary policy enacted in response to Covid would need to start to unwind at some point, that unwind should be enacted by an increase in Bank Rate, and if appropriate would not need to wait for the end of the current asset purchase programme.
In other words, even those who are presently opposing interest rate rises think they must happen soon. And if there is any doubt that it is interest rate rises rather than reversal of quantitative easing that will take place he said:
[T]he monetary policy response, if we need to make one, to the inflation pressure should involve Bank Rate not QE. There is no reason to beat about the bush on this point.
So, what we have learned is that interest rate rises are likely. February is now being pencilled in, and for good reason, I think.
I will ignore that the economic reasoning for this, which focuses on the relationship between unemployment and inflation as if these two are now related when very obviously there is a disconnect which makes the logic of the so-called Phillips Curve a part of economic history now.
Instead, I will discuss the glaringly obvious, which Bailey ignored, which is that the causes of inflation are very obviously temporary, and have nothing to do with any issue that might be addressed by the use of monetary policy.
Increasing interest rates will not produce lorry drivers.
It will not address food shortages.
It won't change fundamental market failure due to Brexit.
It cannot correct the Northern Ireland protocol.
It can't tackle the uncertainty from Covid that persists.
It will not recreate free movement.
It will not end the cost of shipping goods through ports where many checks now have to take place.
In fact, none of the causes of inflation will be tackled by a rate rise, because they are all temporary, due either to international fuel price changes or, very much more often, Brexit.
But although people will already be facing significant additional burdens this winter, from extra costs, to cuts in benefit, to higher taxes, all of which will have a significant impact on demand Bailey wants to increase interest rates to reduce demand further because he believes two things.
The first is that demand is too high, when glaringly obviously the problem is on the supply side of the economy unless you happen to be in the very fortunate person al position he and his friends enjoy.
And second, he thinks things should return to 'normal' - which is even implicit in the economic references in this speech being to Friedman.
So, a man cocooned from the real world by a career in an exceptionally highly paid and very largely risk-free occupation that will provide him with income security for life behaves as if all are in the same place because he simply cannot comprehend that there might be those who do not enjoy his privilege. As a result he suggests that they must have their inflationary spending habits (which do not exist) kicked out of them by an interest rate rise.
This is economic callousness driven by incompetence writ large. No wonder Danny Blanchflower and I talk about the need for Mile End Road Economists - providing the view from outside the City walls.
What the Governor announced is that life is going to get very much tougher for those already on the edge. That we are heading for a period of severe economic downturn - all deliberately manufactured by policy decisions - seems to be certain now. And Labour is more than happy to go along with this with its balanced budget fetish, so loudly proclaimed by Rachel Reeves yesterday. But then she began her career with ten years at the Bank of England. What else can we expect?
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I don’t disagree that an interest rate rise is incredibly unlikely to have what appears to be the BofE desired outcome. I would disagree however about the temporary nature of the reasons for inflation – unless you mean that once we have reached a new high price set level it will just stay there. None of the current causes of price rise are going away anytime soon. Though as we see with the current fuel rate jump of yet another 10pL the willingness on the part of some to exploit situations is considerable.
The one area where I could see the possibility of higher interest rates having an impact is on house prices- but only if it was a pretty significant rise – and I’m not advocating for that.
But they are all temporary; they fall out if the index in twelve months even if they continue in that case
Indescribably stupid is I how I would put this and seems likely to be the case. And – as you say correctly – cruel too.
Again, Timothy Snyder’s concept of ‘inevitability politics’ comes into view – this idea that TINA and that decisions like this cannot be avoided has a certain Orwellian quality to it too.
Except that the world is not Left, or even progressive – it is fanatically Right wing.
Cruel, indifferent – all the makings of a slave state in my view.
Austerity = economic recession
Economic recession = Decline in economic competitiveness
Decline in economic competitiveness = Falling exchange rate
Falling exchange rate = higher inflation
Am I missing anything?
Yes, you think exchange rate is that significant
Look at the last few years
I think that Rachel Reeves MP spent a bit less than 10 years at the Bank of England.
Bu that’s not the main thing. I learned from branching off your blog triggers that Danny Blanchflower has worked on the economics of happiness, and notes that marriage and frequent sex correlate with a rise in happiness. Time to decriminalise the brothels one would think.
Are you sure that follows? I am nit
The first thing that grates is the arrogance to claim he speaks for 9 others… all of whom could speak for themselves.
Second, with rates where they are it is a statement of the obvious that the next move is up. He suggests it’s just a matter of time but timing IS the issue – and an issue where the committee disagrees. Saying there is unanimity is disingenuous.
With both monetary and fiscal authorities talking about a coming tightening of policy I am worried. The BoE would do better to wait and see how fiscal policy develops before tying itself to tighter monetary policy.
The only bit I agree with is the idea that we could have higher rates and still have QE. This adds a second dimension to the execution of monetary policy which is good… IF used properly.
I see no excuse for an increase until we know inflation is in the system, not issues
Agreed.
All too numbingly predictable. But thanks for saying it.
“Examining the relationship between 3-month and 10-year benchmark rates and nominal GDP growth over half a century in four of the five largest economies we find that interest rates follow GDP growth and are consistently positively correlated with growth. If policy-makers really aimed at setting rates consistent with a recovery, they would need to raise them. We conclude that conventional monetary policy as operated by central banks for the past half-century is fundamentally flawed. Policy-makers had better focus on the quantity variables that cause growth.
Reconsidering Monetary Policy: An Empirical Examination of the Relationship Between Interest Rates and Nominal GDP Growth in the U.S., U.K., Germany and Japan”
https://www.sciencedirect.com/science/article/pii/S0921800916307510ing interest rates.”
That has to be one of the most stupid statements I have rad for a long time
As they say, rate increases follow growth
That’s because that’s what happens when inflation develops because of growth
And so they conclude that to start growth you increase rates
It takes a considerable stupidity to come to that conclusion