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No rate rise without a pay rise

The markets believe it.
12 highlights from 2022

The markets believe it. As the Bank of England is expected to raise interest rates on Thursday morning for the first time in more than a decade, the pound has climbed steadily against the dollar. Yet it’s unprecedented, and extremely risky, to raise rates at a time when real wages are falling. With many households already spending far more than they earn, even a small rate rise risks pushing them over the edge. A rate rise could lead to debt repayments – on mortgages, for instance – becoming unsustainable or discourage investment by businesses wary of an impending Brexit storm. In such a scenario, Britain may be tipped into a recession the Bank would be unprepared to handle.

That’s why Positive Money is organising a campaign action outside the Bank on Thursday morning to call for “no rate rise without a pay rise”. Britain faces a range of underlying economic problems, and a rate rise will solve none of them. Analysts think the reason behind the Bank’s likely decision is that low productivity means output won’t keep up with demand, which will push up prices. But as Oxford professor Simon Wren Lewis warns, raising rates will discourage investment and undermine productivity even further.

The problem is that under the current framework, the Bank doesn’t have an adequate response to the combined challenges of feeble productivity, dangerous asset price inflation and ballooning private debt. But that framework represents a narrow and limited perspective on what the proper relationship between government and the central bank ought to be – a perspective responsible for causing the mess Britain finds itself in, in the first place.

Since the financial crisis, cooperation between fiscal and monetary policy has been non-existent. Years of fiscal austerity have left monetary policy to do all of the heavy lifting in the recovery. But the tools used by the Bank to stimulate the economy have been fundamentally flawed. Billions of pounds in quantitative easing have pushed up asset prices, forcing people to spend more of their income on housing costs. And because banks prefer lending to mortgages and financial speculation, low interest rates have mainly served to further inflate the property market – mortgages, in fact, represent half of all bank lending in the UK. Neither the liquidity poured into the economy via QE nor the ultra-low base rate have been properly passed on by financial markets into the real economy.

The Bank of England faces its current predicament thanks to an ongoing failure to think beyond a limited, orthodox form of the central bank’s role. By keeping rates low, it risks inflating asset bubbles even further. But with incomes so weak, now is the wrong time to raise them. The way out of this catch-22 is to end our reliance on a broken institutional model.

Austerity must end and the government must invest to bolster wages and confidence. But it needn’t do so without help from a bolder form of monetary policy. The most effective solution to counter struggling incomes would involve cooperation with the central bank. Were the Treasury to allow the Bank of England to direct new money into the real economy, the resultant spending would boost economic activity in a fair and sustainable way.

This idea, called QE for People, has been supported by world-leading economists such as Lord Adair Turner. QE for People targets the problem at its source: in place of unsustainable demand and weak investment, a robust programme of government spending would resuscitate the economy.

Lord Turner has written that QE for People is ‘an essentially political issue’. Let’s make sure our politicians take up the challenge.

If you’re in London on Thursday, please join our campaign action at 8.30am outside the Bank of England. Click here for more details.


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