The Bank of England: it is not your friend.

One of the strangenesses of running a political website as a commercial endeavour is that one is reliant on the articles to pull in advertising revenue, and this means more popular items take priority.

More meaningful items then take a back seat until such time as they can be funded by the other material – but fortunately, today, lots of people are enjoying the Suella De Vil song, so I have an opportunity to look at why the Bank of England is hiking interest rates and worsening the UK recession.

I’m taking the information from Professor Simon Wren-Lewis’s Mainly Macro article (link below), which suggests the most likely reason I’ve seen so far – and it isn’t to stop energy price inflation, nor is it to stop food price inflation.

No – it’s to stop wage inflation. The aim is to impoverish you by increasing the difference between what things cost and what you can afford.

Here’s Prof Wren-Lewis:

A UK recession will do almost nothing to bring energy and food prices down. Instead what has worried the Bank for some time is that the UK labour market appears pretty tight, with low unemployment and high vacancies, and that this tight labour market is leading to wage settlements that are inconsistent with the Bank’s inflation target.

You can see the reasoning behind this, just with the forthcoming strike by the Royal College of Nursing, that is calling for a 17 per cent pay increase. The Bank’s inflation target is just two per cent, and has been for many years.

The article continues:

Earnings growth is around 7.5% in the wholesale, retail, hotels and restaurants sector, about around 6% in finance and business services and the private sector as a whole.

Domestic firms are under no obligation to compensate their employees for high energy and food prices, over which they have little control and which are not raising their profits. As a result, if firms were free to choose and there was abundant availability of labour, they would offer pay increases no higher than the increases we saw during 2019.

Average private sector earnings running at around 6% are not a problem for the Bank because it is anti-labour, but because it believes wage growth at that level is inconsistent with its inflation target of 2%… Earnings growth will slow as the UK recession bites.

What this means in layperson’s terms is that, by increasing interest rates, the Bank intends to make it harder for many firms to survive in the hope that they will lay off staff, forcing more people back onto the labour market.

Then, firms would be able to offer whatever wages they wanted (above the minimum, of course) on a take-it-or-leave-it basis, and if you couldn’t make ends meet, then that would be your problem.

It is a premeditated, deliberate attempt to worsen poverty for millions upon millions of UK residents.

I wonder whether this is another unintended consequence of Brexit? When the UK was obligated to accept workers from the European Union, employers benefited from exactly the kind of loose labour market that allowed them to offer subsistence, or lower-than-subsistence, wages.

Now those workers have gone and employers are forced to take on native workers, the pendulum has swung the other way. It’s a thought, isn’t it?

Prof Wren-Lewis goes on to explain that developments in economic thinking mean that the tight labour market should not require an interest rate hike to “correct” it (his word).

nowadays macroeconomists believe it is possible to end a boom [in this case an over tight labour market] and bring inflation down without creating a downturn or recession, because once the boom is brought to an end a credible inflation target will ensure wage inflation and profit margins adapt to be consistent with that target.

The lags in the economic system mean a central bank should stop raising rates while inflation is still increasing. If a central bank believes it will lose credibility by doing this, and feels it has to continue raising rates until inflation starts falling, this will lead to substantial monetary policy overkill and an unnecessary recession.

If that is why central banks in the UK and the Euro area keep raising interest rates as the economy enters a recession, then the truth is central banks are throwing away a key advantage of a credible inflation target. Credibility is not something you constantly have to affirm by being seen to do something, but something you can use to produce better outcomes. Furthermore central banks are more likely to lose rather than gain credibility by causing an unnecessary recession.

Of course raising interest rates to 3% is not enough on its own to cause a prolonged recession. Probably more important is the cut to real incomes generated by higher energy and food prices, which is enough on its own to generate a recession. On top of that we have a restrictive fiscal policy involving tax increases and failing public services. Both together should be more than enough to correct a tight labour market. To have higher interest rates adding to these already large deflationary pressures seems at best very risky, and at worst extremely foolish.

This will affect you all.

Sadly, as I indicated at the top of the article, only a few of you are likely even to have read any of the information here – certainly not to the end. So very few of you are likely to make any preparations for it.

For the rest, the next few years are going to be very difficult indeed.

Source: mainly macro: Why is the Bank of England making the expected UK recession worse?

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