Bank of England Votes to Hold Interest Rates

Bank of England policymakers remain split on rates, according to the BBC on 18th May 2011

“Bank of England policymakers voted six to three in favour of keeping rates on hold at a record low of 0.5% this month, minutes of the Monetary Policy Committee’s (MPC) May meeting show.

It is the fourth month in a row that three members have voted for a rise.”

The MPC said there w

as a “good chance” inflation would hit 5% this year.

Following the meeting, it emerged that consumer prices inflation had jumped unexpectedly in April to 4.5% – more than double the Bank’s 2% target.

It forced the Bank’s governor, Mervyn King, to write yet again to the Chancellor, George Osborne, explaining why the target had been overshot by more than one percentage point.

The minutes also noted an apparent disagreement over the economy’s growth prospects this year.

“There remain substantial uncertainties, and a wider than usual range of views among committee members, regarding the outlook for growth,” said the minutes.

Among these uncertainties were the impact of the income squeeze on UK households, the extent and pace of an expected pick-up in exports, and whether the large profits currently being made by some UK companies would be reinvested.”

We believe that this method of ‘steering’ the economy using interest rates is a great cause of instability. It is a little like driving a car by stepping on the brake and the accelerator at the same time. When the economy is ‘overheating’, the banks have their foot on the accelerator (creating more money as debt) while the Bank of England has its foot on the brake (raising interest rates to slow down the borrowing). When the economy sinks into a recession, they swap pedals, the banks slam on the brakes (refusing to lend) and the Bank of England steps on the accelerator by cutting interest rates to their lowest level.

This type of management of the economy will never lead to economic stability. In the recent financial crisis, the lowering of interest rates harmed savers, who were now earning less on the money they had invested, in the hope that banks would be able to get more people into debt. It is completely unsustainable.

There is another huge social cost to managing the economy in this way. When interest rates are cut pensioners who were living off interest income from their savings are plunged into poverty. Interest rates are kept low to encourage people to get into debt in order to stimulate the economy. When the economy successfully pulls out of the recession the Bank of England then increases interest rates, almost bankrupting the very people who rescued the economy by borrowing when interest rates were low. This is exactly what happened in the sub-prime crisis.

We propose to implement a system that would create money debt free – a banking system that does not give banks any responsibility for creating our money supply (so that bankers can be bankers and lend real money to people who want to borrow it).

An independent Monetary Policy Committee would be in charge of supplying money and gifting it to the treasury (or taxing it out of existence). The MPC would no longer try to control the money supply indirectly by controlling interest rates, but instead would simply create debt free money  and give it to the Treasury (or collect it from the Treasury). It means, the MPC would control the money supply directly. Their goal would be to eliminate inflation and deflation independent of politics with open and transparent goals.

This will be a lot easier than the complexities of manipulating interest rates and employing econometricians to create mathematical formulas (that never work anyway).

And interest rates would be set up freely by the market.