Archive for November 9th, 2021

Bank Holds Rates: But Should It Decide?

Tuesday, November 9th, 2021

In the commentary following what many found a surprising decision by the Bank of England not to raise interest rates yet, one or two economists wondered out loud whether central banks are the right institutions to be taking decisions which have such far reaching effects on the lives of ordinary people.

It is not very long ago that while the Bank of England was responsible for the integrity of the banking system,  the government, via the Treasury, had charge of interest rates, credit limits, hire purchase terms and mortgage terms, maximum payback terms and so on. In other words, the elected government decided on the political priorities and the shape of the economy based on the democratic mandate given through winning a general election.

Nowadays the Treasury is limited to taxation levels and spending programmes, but not the supply of money, the cost of money or the priorities for money.  Meanwhile the markets have free reign on the asset inflation and the currency value. Inflation itself, which appears to be gathering momentum, requires like water to a fire, a rise in interest rates. But the result would be significant for the over borrowed at every level, the kind of decision which is political in nature, as well as in its result. Non political institutions are just not suited for this, nor,  in a democracy, appropriate. Hence the dithering.

The current model of a financial sector awash with cheap money, printed by central banks, largely used to inflate fixed assets, has created the most unequal economy, with the biggest gaps between rich and poor, for generations. This Few first, Many later regime is on its last legs. How it will implode is not yet clear. A soft manageable landing or a hard destructive one?  The combination of Brexit, Covid,  Climate Change with rising energy costs and creaking supply chains, labour shortages and skill gaps, are an unprecedented combination of uncertainties.

A Bank of England dithering over interest rates, a Treasury which appears to have lost the plot and a Government all over the place on multiple fronts is not a combination which inspires confidence. This is no time to rely on muddled forecasts and wishful thinking. The confusion between borrowing and printing is an alarming sign that all is far from well among those who are supposed to know what they are doing.