Last week the Monetary Policy Committee (MPC) of the Bank of England voted to increase base interest rate for the fourteenth consecutive time, to 5.25 per cent. While the rationale behind this move was supposed to be curbing inflation, the consequences will be dire for those on the lowest incomes – with young people disproportionately impacted. And it is a symptom of a much wider problem.
The MPC has found itself repeatedly increasing the cost of borrowing due to its own failure to get a grip on inflation earlier. Increased interest rates means that people already struggling with debt such as loans and credit cards will have to spend more of their income paying their creditors. It’s often the poorest and most vulnerable who find themselves in debt, and who therefore find themselves bearing the burden.
There will also be consequences for the housing market. People with mortgages have already seen their repayments shoot up. Obviously this has had a negative impact on house prices, but it’s put even more pressure on the private rental sector: people who would otherwise be trying to buy are instead renting for longer, and this increased demand is forcing rents even higher. Given that young people and those on lower incomes are far more likely to be renting or to have a mortgage, they’re the ones worst off. Contrast this with older people, a significant proportion of whom own their home outright and have savings. Not only are they debt free, they’re so protected from increasing interest rates their wealth actually increases.
The MPC’s decision is also bad news for workers. We can expect unemployment to increase by approximately 350,000. Again it’s often young people and those on lower incomes who are hit the hardest when it comes to downturns in employment, and who thus pay the price for the Bank’s failings. This is particularly galling considering younger people have already experienced one lost decade of low growth and stagnant living standards.
The picture was much the same when monetary policy was much looser. The MPC was right to lower the base rate after the global financial crisis; the actions of the Bank of England and other central banks helped to ensure that the Great Recession didn’t turn into a depression. However, loose monetary policy increased the value of assets, thereby making the already wealthy even better off.
That said, it’s wrong to lay all the blame with the Bank of England. It’s the government that is the real culprit here. It has failed to implement the supply-side reforms that would have brought about sustainable economic growth – investing in transport and energy infrastructure, liberalising the planning system and allowing millions of new homes to be built. The government’s failure to stand up to rent-seeking nimbys has meant that economic growth has been practically non-existent, with younger and poorer households being most adversely affected.
However, the Bank must accept some responsibility. It has frequently shown itself to be out of touch with ordinary people, not least when last year its governor Andrew Bailey told the public not to ask for a pay rise. The key decision makers at the Bank come from the same background of academia or the City, or they have been long-time Bank employees, which inevitably leads to group-think. While the main criteria for a senior role at the Bank should obviously be economic expertise and a strong grasp of monetary policy, increasing diversity of thought on the MPC is needed. It could be done by increasing the number of external members of the MPC and drawing them from different sectors of the economy.
The main issue, though, is the Bank’s remit. It is supposed to keep inflation at 2 per cent. When one considers the last 25 years in total, it has been remarkably successful. But having such a strict target while only having blunt tools at its disposal causes all sorts of problems. For example, the Bank is deemed to have been successful if it keeps inflation to 2 per cent even if it has been forced to engineer a recession and all the job losses and other misery that goes with to achieve the goal. The remit of the Bank needs to change: economic growth, employment and equality all need to be given greater consideration. Inflation targeting should be replaced with nominal GDP targeting, allowing the Bank to tackle high inflation without hindering economic growth.
Bank of England and government policies have entrenched income and generational inequality while delivering low economic growth. While it is the government that is largely at fault, we need a shake-up at the Bank – in both personnel and its remit – to stop the rot.
[See also: Why Britain is broke, with Ed Conway]