Governor Mark Carney will have to pen a letter to the Chancellor, as inflation figures out yesterday showed price rises of 3 per cent – meaning the Bank of England has missed its target by a whole percentage point. It won’t be an easy letter to write. Faced with twin threats of rising inflation and near-record household debt, conventional thinking leaves the Governor and his colleagues with no good options as to how to respond.
Of course, the Governor’s embarrassment is insignificant compared to what this news will mean for millions of struggling households. More and more people around the UK are finding themselves between the rock of mounting debt and the hard place of falling real wages. Interest rates on the rise, leading to higher repayments on mortgages and credit card debt, only make their situation more difficult. Forlorn signs this autumn were to be found in plummeting retail sales and a squeeze in the services sector, where prices rose and growth slowed.
The Monetary Policy Committee boxed itself in before its November meeting, eventually raising rates so as not to lose credibility. But the UK is experiencing high inflation primarily because of the pass-through of a much weaker sterling for the 18 months since the vote to leave the EU. More fundamental factors are hardly inflationary: the labour market is not overheating, and aggregate demand is weak. But Bank officials are not entirely to blame. They face an unwelcome dilemma. The monetary policy framework, letter-sending conventions included, makes Bank officials reluctant to be seen to be doing nothing in the face of rising prices.
Some at the Bank would perhaps raise rates again, to see off the new rise in prices and curb borrowing. But that would worsen the fragility of an already-meagre recovery. At the heart of the problem is the inadequacy of the nominal interest rate – the primary tool at the Bank’s disposal – as a means of influencing the economy in the face of contemporary challenges. With conventional fiscal policy still shackled by austerity, monetary policy needs decision makers to think outside the box. New tools are needed to channel sustainable investment into the economy.
One such tool is QE for People. The Bank of England has created money before – £445 billion of it since 2009 – and it could do so again, on cue from the Treasury. Instead of being ploughed into financial markets, new money could finance much-needed public expenditure, to remedy the slack in productivity and give real wages a boost. Recovery would be secured without ballooning debt. Then the Bank could raise interest rates with a clean conscience.