Bank

The Bank of England can’t save people from this cost of living crisis – that’s Boris Johnson’s job | sahil dutta

In the 25 years since the independence of the Bank of England, politicians have readily accepted the idea that they have no place in monetary management. Yet with inflation now at 9% – levels not seen 40 years ago – that claim has been shattered.

Instead, senior Tory MPs chastised the Bank for letting prices soar, suggesting Covid stimulus measures had been allowed to go on too long. For his part, Bank of England Governor Andrew Bailey has also ditched neutrality with his repeated calls for workers to show “restraint” and sacrifice higher wage demands.

While the transparency is refreshing, the focus on headline inflation is a red herring. In an economy as unequal as the UK’s, the central bank’s blunt policy tools risk reinforcing many of the economy’s underlying weaknesses.

Whatever the deputies and the governor may insinuate, it is neither the borrowing nor the workers who have driven prices up. Instead, the blow to consumers comes from rising energy costs, the strangulation of supply chains by China’s Covid lockdown and the choice of some of the biggest companies to collect profits exceptional. So much so that, according to Keir Starmer, a U-turn on a windfall tax on energy companies – which earn £32million in windfall profits – is inevitable.

These factors are beyond the immediate control of the Bank. Yet he has responded to political pressure with the only major tool at his disposal, raising interest rates four times in the past six months, with the promise of more to come.

Higher borrowing costs will not affect wholesale energy prices, supply chains, or energy company price mark-ups. Instead, their intended effect is to cause a slowdown in household spending, relieving demand for labor and thus neutralizing the possibility of wage increases. This is despite the Bank’s research showing that wages have not been a major factor in recent inflation.

More than any definitive technical reason, the Bank’s rationale, like Bailey’s warnings, seems performative. Faced with the first inflationary crisis of the century, the Bank’s inability to do much more than castigate workers struggling with falls in real pay, reveals the broader challenges it faces in governing in the public interest.

In its own words, the official purpose of the Bank is “to promote the good of the British people by maintaining price stability and financial stability”. Sounds simple enough, but the good of who people and the stability of what pricing is not that simple. Certainly, since the financial crisis of 2008, the implementation of his mandate has only seemed to reinforce the skewed economic results of the United Kingdom.

The extraordinary monetary policies of minimum interest rates and the quantitative easing programs of asset purchases which followed the crisis were crucial in counterbalancing the budgetary austerity. Yet the main effect of cheap credit was to support the wealthy, who borrowed to acquire assets. In 2015, house and stock price inflation was rising, but GDP, productivity and wage growth languished.

Then, when Covid-19 threatened to disrupt financial markets in March 2020 and undo the returns accumulated by asset owners, the Bank stepped in again, acting to increase the wealth of asset owners, in order to protect “stability” for everyone else. In just two weeks, he doubled the size of the asset purchase program to nearly £1bn. At the same time, rates were pulled down and large companies received direct financial support.

The period proved that the Bank was extremely effective at protecting asset prices, and there were significantly fewer MPs complaining about its actions. Yet his multi-billion pound interventions left the underlying problems of the economy untouched.

Today, as the Bank tries to reverse the policies that defined the past decade, there is a risk that “stability” will once again be delivered on the backs of the poor. While it is possible that rising rates will break the cycle of cheap debt and rising asset prices, that is not the goal. Without sweeping support elsewhere, rising rates will instead hit the working poor who borrow to pay for basic necessities.

Another path would be to review the mandate and truly govern for the public good. This would mean stepping in to support areas that financial markets routinely undervalue and governments routinely lack resources.

Appropriate investment in public care provision, for example, could reduce costs for those receiving care while increasing the wages of those providing it. Likewise, investing in home insulation and increasing social security would all help combat the economic crisis that many are currently facing. These are measures that an ambitious government would need central bank support to implement. A shared goal and coordination that has been glimpsed sporadically during the pandemic.

At the same time, the Bank must be more courageous in whom it asks to make sacrifices. In the age of stagnation, there has been no growth to dissolve the distributive struggle. It is capital, not labor, that must restore the balance.