A friend asked me if I thought the BOE should hike rates after I spent some time sounding off about the awfulness of monetary policy, and whilst my answer is no, the real and very pressing answer is more like ‘who cares?’. Yes it’s true that a rate hike would cause misery for householders, given that the economy is reaching levels of indebtedness similar to the environment that caused the financial crisis, but it’s not like I think that keeping rates on hold really improves things for anyone either. QE and Zero interest rates have just about got our banks lending to the real economy, but the vast majority of credit has been extended to purchase non productive things, like houses and financial instruments. Keeping this tap on continues the gross imbalance of cheap capital for unproductive activities, vs expensive capital for productive activities. It’s still hard to get funding for small businesses, or to finance inventory/supply chains if you’re a factory.
This is not to say we should hike rates to address this imbalance, because the consequence is worse, but rather to illustrate the point that we have reached: Monetary policy simply does not impact the real economy in the way we want. We have politicians and central bankers seriously debating whether there is 1 or 1.5% worth of ‘slack’ in the economy (defined as resources, capital or labour, lying idle) whilst some 25% of young people are not in education, training or employment. More people than ever are using foodbanks at a time when it costs the government 1.9% per annum to borrow money for 5 years. What is needed now is not monetary policy, but real reforms. Having a malnourished, untrained and disempowered population is reducing our collective capabilities at a time when we are more than capable of deploying abundant financial capital to sort these problems out. Unfortunately, these solutions involve empowering poor people, and we have a government that simply will not do this.
The central bank is staffed by people who understand economics and they ought to step up at this point and order politicians to do what is necessary. The fact that they are focusing on abstruse measures of economic performance like GDP and RPI inflation when more direct measures of wellbeing like malnutrition are rising is absurd. The bank needs to step up and tell politicians to lay ideology aside and stop making their job impossible. There is no point trying to run a sensible monetary policy if the government of the day is determined to undermine prosperity for ordinary people, and the bank should tell them this.