As the clock ticks down to Thursday’s decision on interest rates by the Bank of England, temperatures are rising over whether its monetary policy committee will cut them by a quarter of a percentage point. Yes, that is 0.25 per cent.
Of course, the decision will be important but the volume of noise in the City is in danger of drowning out a debate that is needed about what our central bank’s goals should be and how it goes about achieving them.
At one point in his best-selling book about a doctor’s life in Britain’s hospitals This is Going to Hurt, Adam Kay says that people love the NHS despite its faults, adding: “No one talks in fond tones about the Bank of England.”
The Bank’s governors would certainly agree that they do not want or expect love, but perhaps some respect for doing their best to hit their statutory target. The problem is that their target of keeping inflation at 2 per cent with a margin of error of 1 per cent on either side has proved inadequate.
Inflation has been as high as 5.2 per cent and below zero over the last 10 years and yet interest rates have hardly moved since 2009. This shows that the Money Policy Committee MPC has kept its eye on the longer-term goal of keeping the economy afloat.
Like a swan, all the action has been going on below the surface. Since November 2009 it has injected £435 billion into the financial system through a process known as quantitative easing (QE).
QE, as it is generally known, involves buying government bonds from investors and crediting their accounts at the bank with an equivalent amount in cash. All that cash going into the bond market will also push up the price of bonds, simultaneously bringing down yields.
While that sounds technical, it was important as it pushed down interest rates attached to yields, lowering the cost of borrowing and providing a stimulus to the economy. That helped pull the economy out of recession in 2009.
But the £435 billion has stayed in the system and, with interest rates near zero, both households and investors have found it easy to borrow to buy assets such as homes, land and art while pushing stock markets to record highs.
The slump in rates has delivered a hammer blow to pensioners whose annuity rates are among those connected to gilts. This means that their income has decreased.
The Bank’s own research in 2018 found that while the wealth of the top tenth of wealthy households rose by an average of £350,000 between 2006 and 2014, the bottom tenth of households gained just £3,000 or £375 a year.
Add to that the fact that average wages have only just got back to their level before the crisis and it is not unreasonable to ascribe the rise in populism to a general anger that “ordinary people” have suffered while the banks were rescued, and no financier has gone to jail for events during the crisis. The Leave vote in the referendum was almost certainly boosted by those “left behind” by the rush to buy assets.
The Bank is an agency of the government and cannot change all its own rules but can at least begin the debate. There is no shortage of suggestions. One collection of ideas by the thinktank NIESR includes a dozen proposals by experts in their individual fields.
Ideas include raising the inflation target to 4 per cent from 2 per cent and giving greater focus on what is happening in financial markets and asset prices. The fact that the Bank now holds half a trillion pounds of debts raises the need for it to coordinate with bodies such as the Debt Management Office and the Prudential Regulation Authority.
The fact that the voting record of the MPC shows little evidence of dissent raises the need to look at whether external members should be chosen in a way that offers more debate and less consensus.
Labour's idea of a People's QE, under which the Bank would purchase bonds for a state-owned National Investment Bank that would finance projects such as transport and council housing, might be dead for now but should not be forgotten.
This week’s MPC meeting will be Mark Carney’s last as governor and the arrival his successor in the form of Andrew Bailey, gives a once-in-eight-years opportunity to embark on a serious rethink. The US Federal Reserve has started a review and last week the European Central Bank (ECB) did the same but in the UK, the Government have sat on their hands.
The most important decision the Bank can take this year will not be on interest rates on Thursday but to launch that wide-ranging review to help establish a new bank for a new era.