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The Bank of England isn’t a miracle worker

The Bank of England has come under attack recently from many members of our political class due to varying perceived failures. Now, I am not one for defending ruling-class institutions but the attacks being made are mostly just a distraction from the failure of successive governments.

In light of today’s new inflation figures which are unchanged from last month, at 8.7%, the BoE has been criticised for failing to control inflation. But as the title of this article states, the Bank of England isn’t a miracle worker. Monetary policy cannot compensate for poor state and fiscal policy. They cannot make up for incompetent, unserious and short-term policy decisions made by governments.

Why is inflation at its highest level in decades? There are varying reasons that I will quickly run through. Britain spent around £400bn during coronavirus, this was to pay for the Job Retention Scheme, Test and Trace, NHS costs and support for businesses. This is money we did not have, it had to be created through the government selling bonds to private investors but also the BoE, flooding the economy with new money is inherently inflationary, as certain people warned at the time. The BoE has also before coronavirus engaged in a scheme of Quantitative Easing, which (including covid spending) totals around £900bn since 2008. Add the costs of the Energy Price Guarantee and Britain has potentially added £1trn of new money into our economy. With this injection of new money, we saw the price of assets such as housing skyrocket, helped enormously by a restriction of supply due to state planning restrictions, if there is a shortage of supply (especially of key assets like homes), prices naturally go up thanks to demand, inflationary. Britain has some of the highest energy costs in the world, this is due to a lack of domestic supply and investment in energy infrastructure, but it is also to do with sanctions on one of the world’s biggest energy suppliers, Russia. As countries compete for a restricted supply of energy, prices naturally go up. Energy is a necessity, it is not a luxury, it affects every aspect of the economy, from food production to office lighting, when the cost of energy rises, so does everything else. This is why it is then supremely stupid to engage in a series of self-sabotaging net zero policies which will further restrict Britain’s energy supply and drive up costs even more.

Britain’s inflation is not driven primarily by demand but by supply, or lack of.

A lesser-discussed consequence of major mass immigration, which Britain has experienced over the last decade is that if there are more people competing for a lesser number of goods/assets then again, prices will naturally rise. So we have a situation where wages are stagnant (since 2005) and potentially depressing because the labour supply is being flooded with cheap foreign labour, which drives demand for a restricted supply which then drives inflation which people cannot afford to keep up with because their wages are stagnant/depressed. But our super-intelligent economists say that immigration reduces inflation!

Inflation of course is a global problem, but there is a reason the US inflation rate is half our ours. Their economy is much stronger, individuals are much richer (GDP per capita) meaning inflation doesn’t hit their citizens as hard as it does here, and they are effectively energy independent, meaning they are less susceptible to global supply restrictions and prices.

So what can the Bank of England do to attempt to control inflation? Its main tool is to raise interest rates. They are doing this, slower than many would like, but if the primary driver of inflation is supply rather than demand, raising rates only increases the costs of production and prices will keep rising. The rate is currently 4.5% with The Times today calling for a rise to 5%. Another rise means higher costs for individuals and families who haven’t seen any real wealth growth for the last two decades. Not acceptable.

I know very little about the current Governor of the Bank, Andrew Bailey, but what I do know and what is concerning is that the Governor and the PM/Chancellor do not meet or discuss regularly. Whether it would be helpful for them to meet is another question, but I certainly believe that during a time of high inflation, it is important to have honest discussions between the Bank and the government. In terms of Bailey, I have provided snippets from Dominic Cummings blog:

The Bank can raise interest rates and cause a recession and misery for ordinary people yet again, that is their prerogative, if you are a Conservative (I am not so this is free advice) you should not be pushing for this however. The Bank of England operates in this state of quasi-independence, in 2020 when the government needed money to pay for coronavirus costs, if the Bank had refused, discussions were already taking place to re-nationalise. If the government can just threaten the Bank every time it wants something, how independent is it really? Besides, when the Chancellor appoints members to the Monetary Policy Committee which sets the rates, again how independent is it? Or do we just need a better Chancellor who makes better decisions? (Yes).

Voters will not care about this independence either, all they will see is a government responsible for yet another fall in their living standards. Conservatives will be wiped out at the next election, and you will deserve it too.

The attack by many Conservatives on the Bank is to distract from their own party’s failures. A party that has been in charge for the last 13 years and has basically no achievements besides one that it was pushed into (Brexit) has allowed the British economy to become structurally weak. They haven’t built out our energy infrastructure, in Finland energy costs actually reached zero due to their abundance of energy. They haven’t allowed citizens and companies to build houses leading to storage of supply and increased demand by importing millions of migrants. They printed more than £1trn flooding the economy with new money, neglecting to spend it on inflation reduction (such as energy infrastructure) instead, spending it on a failing healthcare system and day-to-day spending. Not to mention breaking the economy for a bad flu.

Our current predicament leaves young people and families hardest hit yet again, and if talk of protection for mortgages is anything to go by, the British system has truly lost the plot. The Bank of England is not innocent but it cannot create miracles overnight, its power is limited and it can only act within the economic situation presented. If you want someone to blame, you can point your finger right at the British ruling class.

The whole system is broken and there is no error correction coming. Britain is facing yet another economic crisis less than 15 years after the last one and once again, we do not have serious people leading us through it.

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