I just posted this as a Twitter thread (I refuse to call it X):
The Bank of England has kept interest rates on hold at 5.25%. It says it may still need to raise rates if the war in Israel / Gaza impacts prices. It claims this is not the time to cut rates. And each of those decisions and claims is wrong. A thread....
The Bank of England says interest rates need to be high to cut inflation. Inflation is falling though, but not because of high interest rates. For example, next month, inflation will fall because gas prices have fallen recently.
Gas prices have not fallen because the UK has high interest rates. They've fallen because the international price has fallen as relative stability has returned to global energy markets after the turmoil when war broke out in Ukraine.UK food prices are also falling. But that's mainly because the cost of our imports is down. And those prices are not affected in the slightest by the UK's rate of interest.
The Bank also admits that the prices of manufactured goods are also falling. But we import many of them, and the price of such goods is falling in countries from Germany onwards. Again, that has nothing at all to do with UK interest rates.
The claim that inflation is being reduced by interest rates is, in that case, quite wrong. Or, to be blunt, simply not true. And frankly, the Bank of England must know that because they forecast that inflation is going to fall to 3% by the end of 2024.
So, the Bank of England think that the rate of inflation is likely to fall by nearly 4% over the next year. But despite that, they want to keep interest rates high - the hint is at the current rate - so that they can claim that by the end of 2025 inflation might be 2% again.
There's one big flaw in the Bank of England's strategy. It's that the one area where inflation rates are still high is services. That's not true of the most important services that we consume: they are things like education, healthcare and so on. But they're paid for with tax.
So what services have gone up in price? Things like going out. But that's because most small businesses run on overdrafts and have to pass interest rates on. And it's things like car leasing - but that's totally related to the rate of interest, too.
And then there are rents, of course - where the price people (and businesses) pay in the private sector is almost totally related to the rate of interest landlords pay - and so prices are going through the roof.
After which, there are things like phones, water, and so on - which go up simply because regulators let them do so by much above the rate of inflation - which they are doing because their costs of borrowing have risen, all because of the Bank of England.
In fact, in services, most of the UK rate of inflation is probably now down to the higher cost of interest that the Bank of England has imposed on us. In Sweden, where they have tried to measure this, they reckon about half of inflation has now arisen for that reason.
So, we are now in the perverse situation where the Bank of England says interest rates must stay high, even though that is creating inflation. And they say rates could rise because of situations wholly beyond our control again - like war, for the second time.
And meantime, the biggest cause of the remaining inflation that we have - and the reason why the decline in the rate will not happen as fast as it should - is precisely because high interest rates are forcing businesses to increase their prices in the services sector.
So, the bank's policy is akin to saying that it wants low inflation rates but it is doing absolutely everything it can to prevent that from happening by keeping the one price that is really keeping inflation high - which is the price of money - which it sets - as high as it can.
It's fair to ask if economic incompetence gets much worse than this - because that is what the bank is displaying. It's ignoring all the evidence. It's pursuing dogma. It's pretending it has the power to change things for the better.
And in the meantime, businesses, households and even local authorities are being pushed to the brink by high interest rates that the Bank of England alone is imposing and which are making life misery for millions - and are pushing us towards recession.
I wish I didn't have to say this, but the only rational conclusion I can come to based on the Bank's behaviour is that what they really want is a recession. And what they will do to make that happen is keep interest rates high.
Why they might really want to do this I do not know - except that they are fixated on having interest rates above the rate of inflation for the first time in more than fifteen years as bankers see that as a sign of virility, which happens to benefit the wealthy.
For the rest of us, misery follows. But let me be clear: that's not necessary. If you are living in financial stress that's not for the good of the country. That's because some incompetent people at the Bank of England have chosen to victimise you, and there's no comfort in that.
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The way you put it – seems so obvious – the whole BoE narrative is clearly so wrong.
Rogoff has an interesting puzzle on why some countries have not gone with the ‘independent banks’ narrative. He suggests some have done well partly because they boosted interest rates early – but he notes others that are still managing despite not raising interest rates
https://www.theguardian.com/business/2023/nov/02/emerging-markets-debt-crisis-defaults
My main memory of the 1997 election, when I was living in the US and thinking of returning to England, was that the first announcement after the win by New Labour was Gordon Brown saying he’d make the BoE independent for the first time in decades, and my immediate reaction was: “Well, it’s clear whose side this government is on”. And Kid Starver will continue the tradition.
…”the Bank of England says interest rates must stay high, even though that is creating inflation.” Well said Richard. But how is it that the general population doesn’t also see the BoE is actually creating inflation with higher interest rates………..
I wish I knew
Probably because, with very few exceptions, it is unquestioned and unchallenged by mainstream media.
The Tories have effectively washed their hands of this which means that the Bank of England is effectively in charge. Like most former backroom advisors, there is a rush of blood to the head when forced to live in the limelight?
This means – like the Covid enquiry has revealed – that we have the worst possible people at the helm that we could have, at the worst possible moment.
At some stage in the future, these people need to be made accountable for this period and we also need to find out how they got appointed.
Looking at this sideways, the BoE policy is also just a useful hedge by rentiers and lenders against inflation.
This is not the Bank of England – it’s more like a revenue protection racket for banks and the rich.
Some rich incompetent people it might be better to say.
In a just works, these actions would lead to lengthy prison sentences. It’s surprising how many lives the already wealthy can destroy at a distance using financial chicanery and need never for a moment be concerned about any consequences. It’s simultaneously impressive and an atrocity.
The inmates are clearly running the asylum.
The government is expected to do nothing.
The opposition is expected to do nothing, even if they are elected.
And yet broke post-war Britian was able to transform the economy.
Haven’t seen the Swedish research about rates driving half of the inflation we are now seeing. Interesting.
The problem is (as I have observed countless times) if you only have one tool in the box (interest rates) what can you do? Sure, higher rates are driving business costs higher but the BoE reckons that consumers can’t meet those higher prices and so margins get compressed and businesses fail. Yes, it will work but the damage to the economy and people’s lives will be immense.
Government could do a lot more but are ideologically opposed to doing anything, it seems.
Here is my problem. Things could not be worse for the Conservative Government, and the Conservative Party. Their credibility has collapsed. Their political culture is sordid, and they have no genuinely competent, professional political talent. They do not understand the lives of the British people, and care even less.
What is the problem? They may lose the next general election; one parliament – maybe? Maybe not, because a very large proportion of the FPTP electorate (I mean sufficient significantly to affect the result – that may only be 15%-20% of the registered electorate), but that is the nature of FPTP); really do not care how bad the Conservatives are; they remain ideologically neoliberal Conservatives, looking for a home. Many will still vote Conservative (they may deny it, if asked – this is Britain, hypocrisy is a virtue). They may shake their head and protest their shock and horror at what has happened. Ignore it. They do not care, and here is a little evidence: “Only one in 10 voters who supported the Tories in 2019 have switched to Labour, according to a major new poll for Sky News. The exclusive YouGov survey of 5,621 voters found 11% of 2019 Tory voters would now vote for Labour, while slightly more – 12% – have switched to Reform UK, a party to the right of the Conservatives.” (Sky News). That leaves nearly 80% of 2019 Conservative voters still like to vote for THIS Conservative Party.
Roll up the election map for ten years ….. and then – throw it out.
Agreed.
The only explanation to me of this is that maybe in Hannah Arendt’s assertion that there is always a section of any society who seem to respond positively to fascist-like behaviour or it has to do with those in society who are ‘aspirational’ (want to be rich, think they’ll make it and throw their lot in with the Tories).
Some form of tribalism or whatever.
So I read this on Taxresearch (I refuse to call it ‘funding the future…..’ 🙂
But yes. I agree. The BOE = fannies.
At last! Somebody who admits that interest causes inflation. “… the Bank of England says interest rates must stay high, even though that is creating inflation. “
I completely buy the argument that higher interest rates feed into higher domestic prices. It is also about reallocating revenue away from labour and towards capital. For private renting, the inability of individual landlords to deduct all of the finance cost probably also leads to higher rents.
On the price of imports, how much of the goods and services that the UK imports or exports are priced in sterling and how much in other currencies? Dollars, euros, etc? At this macro scale, do higher UK interest rates have a noticeable impact on the price of the imports and exports: for example, is sterling relatively stronger so buys more, but equally our exports are less valuable when exchanged back to sterling? And what would be the impact if the UK cuts interest rates and others don’t?
I have no answer to that question
If a significant chunk of our inflation in the last couple of years – even before Russia invaded Ukraine – seems to relate to imports of energy and food – often traded in dollars or euros – then it seems to me this sort of effect needs to be taken into account.
I wonder if there has been much research, or if the MPC take it into account.
It bis not much referred to in their commentaries
Surely this is the old Balance of Payments issue, that dominated much economic debate in the UK, before the triumph of neoliberalism; and simply forgotten after its triumph?
It’s not widely known that the BofE has Agents with offices around the country, linked to ‘citizen panels’ – the latter introduced by Andy Haldane, the previous chief economist. Their role is to talk to businesses, local government, civil society and the rest to get a sense of what is happening in ‘reality’. They report into the MPC along with the input from the geeks and their models. Their reports are publicly available – see the latest here:
https://www.bankofengland.co.uk/agents-summary/2023/2023-q3
Reading this, the latest report is mostly negative about current conditions and perceptions, much more in line with what we talk about on the blog. Given what we know about the lags in how the economy responds, you would think that it is obvious that they should be cutting interest rates now if they are to avoid driving the economy into recession, flat lining at best. That’s without even factoring in the role of the interest rate in driving inflation, which is going to hit big time when those fixed interest mortgages have to be renewed.
Some years ago I saw this first hand when the BofE was a client and sat in on MPC presentations. I was pleasantly surprised to find that through the Agents they did get real world input which fitted with what I could see for myself. I also observed that they did not take much notice if it did not fit with their economic orthodoxy and deeply flawed models.
Which started me down the track of learning about economics and how so much of what has been taught and practised is deeply flawed and reflects a political ideology.
Thanks for sharing that
I think an angle to this that I’ve not seen you mention Richard, (probably because it is pure speculation on my part – and I don’t read every blog so I apologise if you have), is how much the wealthy benefit from people and businesses going bankrupt. If someone can’t pay their mortgage, the bank steals their home from them. A home that they financed by creating money out of thin air. Much more profitable to steal that whole asset than it is to just have the mortgage repaid and only keep the interest.
Same for businesses; “Your small/medium business has gone bump? Oh what a shame. Oh well, more market share for your giant, publicly listed competitors. (That we, the fabulously wealthy own via our hedge funds and share portfolios). We’ll snap up your physical capital too thank you very much.”
I don’t know if I would agree that they’re incompetent; I think it’s pure greed and malice. Recessions hurt the poor and benefit the rich, non?
Also, isn’t it true that rent is not even included in their inflation figures? If it was the true figure inflation is way higher than what they say. A lot of greedy leechlords are making out like bandits, and the Buy To Let leechlords that are being forced out of the market is a benefit to the bigger fish as well.
It’s all just a massive scam at this point.
Ian Fraser when writing about RBS was very good on this