TThe Bank of England’s Monetary Policy Committee will almost certainly raise interest rates for the eighth consecutive time in a year on Thursday, despite the economy heading into recession. It is not clear why Britain would need the largest rate hike in 33 years. Making money more expensive while the Treasury cuts spending and raises taxes will only deepen and prolong the recession the country may already have entered. Perhaps that was why Deputy Governor Ben Broadbent sent the day Liz Truss resigned to say rates couldn’t keep going up – because it was a drug that would hurt a patient.
The timing of Broadbent’s speech suggests that Truss’s implosion was solely responsible for the rising borrowing costs. However, interest rates were 0.1% this time last year and are expected to reach 3% on Thursday. Using a general rule, the bank charged an annual surcharge of £1,800 for every £100,000 of mortgage debt owed by the borrowers. This is a problem as 1.8 million people whose low fixed rate mortgages expire next year will have to refinance them at a higher cost. Rents will also rise. Truss’s incompetence and lack of a reasonable growth plan are to blame. But it would be wrong for public opinion to blame it for high interest rates and fiscal tightening. The bank and treasury own these decisions.
Doctors no longer believe that bleeding patients will make them healthy. Unfortunately, economic policymakers still do. Olivier de Chatter, the UN rapporteur on extreme poverty, is right to be “deeply alarmed” by the multi-billion pound spending cuts envisioned by Rishi Sunak that will hurt Britain’s poorest people. Austerity 2.0 is likely to be much worse than it was a decade ago. One reason is that at that time public spending was reduced, and so were interest rates. Now rates are rising and government support is dwindling. More people are employed, but at lower real wages. Inflation is rising – but the evidence is that it is the profitable companies, not the workers, that are raising prices.
The bank’s inflation targeting system, which was introduced in 1992, appears to have a bias against workers. Andrew Bailey, its governor, let the cat out of the bag when he admonished workers for demanding higher wages — while companies got away with piling up huge profits, even though their excesses made inflation worse. Raising interest rates benefits the financial sector that the bank aims to regulate. Commercial banks get paid more for holding reserves – 5% of profits for HSBC, Analysts say. The move supports the currency and allows the bank to reassert control over interest rates by tightening and then offering gold bonds to private investors rather than buying them themselves. But higher rates shift incomes from poorer families with no savings to richer families with plenty.
Without mechanisms to keep prices high, they will fall. This is what happened in 2009 after the last big shock. There is no indication that both price and wage setters are raising their demands at the same time. But there are distributional and political options in how to reduce inflation. The Bank puts an oppressive thumbs-up on the measure of economic justice, to ensure the continued – and ominous – dominance of extractive interests in the British economy. As the annual report of central banks shows, they believe that if the rising cost of goods causes inflation, workers, not firms, should pay for them at lower wages. The Bank of England must be stopped in its tracks, and not left to ride rudeness to the public.