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The MPC’s not so happy 15th Birthday
The main statutory objective of the Bank of England’s Monetary Policy Committee, set up on 6th May 1997, is monetary stability.
Over the decade-and-a-half life of the MPC, the Retail Price Index has risen 53%. Many of us scratch our heads when we see the price level statistics, instinctively feeling that the prices of many staples of everyday life are rising faster than that. When we examined this recently, we discovered that many staples of everyday life had more than doubled.
Sir Mervyn King professes no responsibility for the financial crisis or for the fact that this is now the longest-lasting recession in the UK’s history, lasting even longer than that of the 1930s. Yet it was the MPC that persisted in its loose monetary policy in advance of the crisis and did nothing to rein in the excesses that led to credit-fuelled disasters such as the Northern Rock collapse.
QE is doing nothing but inflate prices
The current policy of rock bottom interest rates combined with £325 billion of quantitative easing is failing to produce growth, yet the MPC refuses to change policy. According to the Bank of England website, the purpose of QE – a wholly experimental policy – was to boost lending and thus spending. Neither has happened. Net bank lending has been negative virtually every month since the crash.
Banks have also widened their margins. While savers contend with rock bottom rates that cannot match inflation, overdraft rates are the highest since records began, a massive 40 times the 0.4% base rate.
QE may have helped bankers pay themselves handsome bonuses but there is no evidence it has had any beneficial effect on the real economy. When the banks do finally release the money, it will prove highly inflationary.
In spite of all the evidence, the Bank’s website disingenuously says: “the extra money has worked its way through the economy, resulting in higher spending and therefore growth.”
Inflation is depressing the economy – and everyone in it
Inflation remains well above the government’s 2% target and, while Sir Mervyn King and the MPC keep telling us inflation is just about to fall, it remains stubbornly high. They admit this surprises them yet, over the past four years, the Bank of England’s inflation forecasts a year ahead have been consistently out by a massive 1.5 percentage points. Theoretical economists seem to have no understanding of the real world. Perhaps the MPC should have its ranks swollen by a psychologist who can explain how human beings without economics degrees actually behave.
The poorest sections of society are hit the hardest by inflation. But with wage levels lagging inflation, we are all feeling worse off. Inflation is a stealth tax, creating a massive disincentive to spend at a time when the economy desperately needs consumer spending, the engine for two-thirds of our economy.
The MPC’s policies have hit those who are retiring particularly hard. Members of the MPC have denied that this has anything to do with QE depressing gilt yields but pensions specialists including the National Association of Pension Funds disagree vehemently.
The MPC must change – or be changed
Although the Treasury Select Committee recently called for an investigation into the effect of the Bank of England’s monetary policies, the unelected members of the MPC have been given a surprisingly free rein, despite the importance of their decisions. Successive Chancellors, overseeing massive borrowings – no doubt delighted interest rates remain low – have been unwilling to hold the MPC to task.
You do not grow an economy by cutting interest rates to the bone or by creating magic money from thin air. Yet the policies remain unchanged. Growth remains negligible or negative. Spending remains moribund. The banks sit on the money from QE. The economy remains stagnant. According to Fathom Consulting, this is down to “negative supply shock”, a feature of the 1970s recession. They say that low interest rates and quantitative easing have made the problem worse by exacerbating inflation and conclude that “the right response to a negative supply shock is a modest tightening of real interest rates”.
Given that the Bank of England’s role is about to expand considerably, the time has come to ask if its policies are the right ones for these difficult time. The MPC’s repeated mistakes and refusal to admit that they have got anything wrong is costing the country dear.
In the meantime, by way of light relief, we produced a small animation to “commemorate” 15 years of the MPC. Do feel free to pass it on to others.