In the 25 years since the Bank of England was made independent, politicians have happily played along with the idea that they have no place in monetary management. Yet with inflation now reaching 9% – levels last seen 40 years ago – that pretence has broken.
Instead, senior Conservative MPs scolded the Bank for letting prices soar, suggesting Covid stimulus measures had been allowed to go on too long. For his part, the governor of the Bank of England, Andrew Bailey, also abandoned neutrality with his repeated calls for workers to exercise “restraint” and sacrifice higher wage demands.
While the transparency is refreshing, the focus on headline inflation is a red herring. In an economy as unequal as the UK’s, the blunt policy tools of the central bank risk reinforcing many of the economy’s underlying weaknesses.
Whatever MPs and the governor may imply, it is neither borrowing nor workers that have pushed up prices. Instead, the hit to consumers comes from rising energy costs, the choke to supply chains from China’s Covid lockdown, and a choice by some of the largest companies to collect windfall profits.
These factors are beyond the Bank’s immediate control. Yet it has responded to political pressure with the one major tool it has, increasing interest rates four times in the last six months, with the promise of more to come.
The higher borrowing costs will not affect wholesale energy prices, nor supply chains, nor the price mark-ups of the energy companies. Instead, their intended effect is to engineer a slowdown in household spending, ease demand for labour and thereby neuter the possibility of wage rises. This is despite the Bank’s research showing that wages have not been a significant factor in recent inflation.
More than any definitive technical reason, the Bank’s rationale, like Bailey’s warnings, appears performative. Faced with the first inflationary crisis of the century, the incapacity of the Bank to do much more than berate workers experiencing significant falls in real-term pay, reveals the wider difficulties it faces governing in the public interest.
In its own words, the Bank’s official purpose is “to promote the good of the people of the UK by maintaining price and financial stability”. It sounds simple enough, yet the good of which people and the stability of what prices is not so straightforward. Certainly, since the 2008 financial crisis, implementing its mandate has only seemed to reinforce the UK’s skewed economic outcomes.
The extraordinary monetary policies of rock-bottom interest rates and asset purchase quantitative easing programmes that followed the crisis were crucial to counterbalance fiscal austerity. Yet the main effect of cheap credit was to support the rich, who borrowed to acquire assets. By 2015, house and equity price inflation was climbing but GDP, productivity and wage growth languished.
Then, when Covid-19 threatened to upend financial markets in March 2020 and undo the returns asset owners had amassed, the Bank stepped in again, acting to increase the wealth of asset owners, so as to protect “stability” for everyone else. In just two weeks, it doubled the size of the asset purchase programme to nearly £1tn. Alongside this, rates were pulled down and large corporations were provided with direct financial support.
The period proved the Bank was hugely effective at protecting asset prices, and there were notably fewer MPs complaining about its actions. Yet its multibillion pound interventions left the underlying problems of the economy untouched.
Today, as the Bank lurches to reverse the policies that have defined the last decade, there is a risk that “stability” will once again be delivered on the backs of the poor. Although there is a possibility that rising rates could break the cycle of cheap debt and rising asset prices, that is not the aim. Without radical support elsewhere, escalating rates will instead hit the working poor who borrow to pay for basic necessities.
An alternative path would be to revisit the mandate and truly govern for the public good. This would mean intervening to support the areas that financial markets routinely undervalue and governments routinely under resource.
Proper investment in the public provision of care, for example, could reduce costs for those receiving care while increasing pay for those providing it. Similarly, investing in home insulation, and uplifts in social security, would all help tackle the economic crisis many are now facing. These are measures an ambitious government would need central bank support to deliver. A shared purpose and coordination that was glimpsed sporadically during the pandemic.
At the same time, the Bank must be braver in who it asks to make sacrifices. In the age of stagnation, there has been no growth to dissolve distributional struggle. It is capital, not labour, that must redress the balance.