Why the Bank of England’s tools are broken

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bank of england interest rates

The Bank of England has voted to keep interest rates at 0.25% today. Currently, the policies of low rates and quantitative easing are designed to keep households and businesses borrowing.

But as the weak pound makes imports more expensive, inflation has risen sharply. This prompted a split in the Bank’s monetary policy committee, with three out of eight members voting to raise interest rates in an effort to bring prices under control. This surprise split shows there is disagreement about how to deal with the weak state of the economy.

Since the 2008 crash, the UK economy has essentially been kept afloat by borrowing, especially to property markets, keeping house prices pumped up. But this has meant that people are spending an ever-greater proportion of their income on rents and mortgages, and are increasingly depending on credit to make ends meet. There’s mounting concern about the UK’s level of household debt, which is expected to reach a record high next year.

The Bank is in a bind. Keeping rates low may extend the borrowing binge, but for many people, even a small rate rise will be unaffordable.

Meanwhile, the UK is in the longest period of stagnating wages since the first world war. This, combined with severe cuts to public services mean people’s living standards are getting worse.

The Bank needs new tools which can boost demand in the economy without adding to the excessive levels of private debt. The Governor of the Bank of England has previously said that it’s time for fiscal policy to step into help the weakening UK economy.

He is right to say that fiscal policy needs to do more, as austerity has slowed the economy further. However, shifting the attention onto fiscal policy fails to recognise that monetary policy is out of ammo, and needs a serious rethink.

Many high-profile economists are supporting the idea of monetary financing as a tool to boost demand, which is critical to the UK’s much-needed sustainable recovery.

 

 

 

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