The Bank of England’s monetary policy committee will almost certainly raise interest rates for the eighth time consecutively in a year on Thursday, despite the economy heading towards recession. It is not clear why Britain needs its biggest rate hike in 33 years. Making money dearer while the Treasury cuts spending and raises taxes will only deepen and prolong a recession that the country may already have entered. That is probably why the deputy governor, Ben Broadbent, was sent out on the day Liz Truss resigned to argue that rates could not keep rising – as it was a medicine that would hurt the patient.
The timing of Mr Broadbent’s speech suggested the Truss implosion was solely responsible for higher borrowing costs. Yet interest rates were 0.1% this time last year and they are expected to hit 3% on Thursday. Using a rule of thumb, the Bank has imposed a £1,800 annual extra charge per £100,000 of mortgage debt accrued by borrowers. This is a problem as 1.8 million people whose low fixed-rate mortgages end next year will have to refinance them at a higher cost. Rents will also rise. Ms Truss’s incompetence and lack of a believable growth plan deserve censure. But the public would be wrong to blame her for higher rates and fiscal tightening. The Bank and the Treasury own those decisions.
Doctors no longer believe that bleeding the sick will make them healthy. Unfortunately, economic policymakers still do. Olivier de Schutter, the UN rapporteur on extreme poverty, is right to be “extremely troubled” by multibillion-pound spending cuts envisaged by Rishi Sunak that will hurt the poorest in Britain. Austerity 2.0 is likely to be much worse than when it was attempted a decade ago. One reason is that back then public spending was cut, but so were interest rates. Now rates are rising and government support is dwindling. More people are employed, but on falling real wages. Inflation is rising – but the evidence is that profiteering firms, not workers, are pushing up prices.
It seems that the Bank’s inflation-targeting regime, introduced in 1992, has an anti-worker bias. Andrew Bailey, its governor, let the cat out of the bag when he chastised workers for asking for pay rises – while businesses have escaped censure for amassing huge profits, even though their excesses have made inflation worse. Raising rates benefits the financial sector that the Bank is meant to regulate. Commercial banks get paid more to hold reserves – worth 5% of profits to HSBC, analysts say. The move supports the currency and allows the Bank to reassert its control of interest rates by tightening and then offering gilts to private investors rather than purchasing them itself. But higher rates also shift income from poor households with no savings to richer ones that have lots.
Without mechanisms to keep prices going higher, they will fall. This is what happened in 2009 after the last big shock. There’s no sign that both price- and wage-setters are simultaneously driving up their demands. But there are distributional and political choices in how inflation is brought down. The Bank places an oppressive thumb on the scale of economic justice, to guarantee the continued – and baleful – dominance of extractive interests in the British economy. As the central banks’ annual report shows, they think that if the rising cost of goods causes inflation, then workers, not companies, should pay for it with lower pay. The Bank of England should be stopped in its tracks, not left to ride roughshod over the public.
This article was amended on 3 November 2022. An earlier version said that commercial banks get paid more to hold “risk-free gilts”; that should have referred to reserves.
