Neither a spender nor a borrower be: The problem with the Bank of England

Most students prefer to spend their free time thinking about dating. I, however, prefer to spend my time worrying about inflation and the possibility that I will die a decrepit, diseased vagabond. Admittedly, when I’m not contemplating my future homelessness, I do think about dating as well, so I’m not that special.  Thankfully, the Bank of England has come to the rescue and is appearing to try to fix my problems (about being able to buy a home, not about getting a girlfriend). By doubling the interest rate to 0.5%, the Bank of England seems to be taking an active interest in controlling inflation. 

Although initially pleasing, we do have to realise that this problem has been caused by about 15 solid years of quantitative easing (QE) – a hotly contested policy by both sides of the political aisle. Initially introduced by some wily Japanese economists in the early 2000s, quantitative easing seeks to fight deflation by digitally creating money and using said money to buy back government bonds and other central bank assets from private investors. This boosts cash flow in the economy and is said to promote riskier investments. Combined with a low interest rate, quantitative easing helps to encourage lending and borrowing within an economy – juicy, right?  

This policy, admittedly convenient when dealing with a sudden shortfall of money supply, is not without its long-term drawbacks. Quantitative easing has always been accused of causing inflation in the economy since its inception. The present-day is an obvious example of this in action, with inflation currently reaching a record of 5.4% – the highest rate in about 30 years. To those of you wondering why a Greggs sausage roll now costs a tragic £1.05 rather than the affordable £1.00, this is it. 

An interest rate hike does help. Unfortunately, it simply isn’t enough. The interest rate needs to increase more than a measly 0.25% to help save the economy from the hyperinflation likely to come knocking on our doors. The government is increasing National Insurance to control the money supply, true, but not in the right places. Yes, strides have been made to make the super-wealthy pay taxes, but the fruit of that labour is yet to be seen.

Moreover, Brexit has completely changed the nature of British trade, and has potentially negative consequences for the strength of the pound, which ironically compounds the weakness of the money in our pocket. Britain is in a unique situation, and we do not have the innovative solutions to fix it beyond the stale ‘tax the wealthy’ rhetoric from the left and the ‘limit government spending’ assertions from the right. 

The recent adoption of quantitative easing means that there are no real solutions to offset its long-term consequences. Nevertheless, with its mass adoption across the globe, it cannot reasonably be seen as a fresh development within macroeconomics. Like all sliced bread, it’s become a bit stale, and nobody seems willing to throw it out yet. 

Part of the problem is the Bank of England’s inability to recognise that their overreliance on quantitative easing is unhealthy. Governor Andrew Bailey has criticised claims that it is an ‘addiction’. To be fair, what else would you expect from a man chosen by the government for his ‘technocratic skills’?

Common sense dictates that we innovate when new problems arise. The Japanese economists did it in the early 2000s, why shouldn’t we? The difficulty of doing this lies in the government’s control of the Bank of England. Although the government is not officially involved in the actions of the Bank of England, the Chancellor of the Exchequer directly controls the appointment of the governor and the directors, meaning they are still able to control it. This creates an effective mirage of decentralisation and diversity of thought that helps promote innovation. It’s a lie. 

To fix this, the government needs to give the Bank of England more freedom to choose the Governor. Central bankers have a far greater idea of the economy than career politicians who talk about culture wars. To be honest, I would be completely unsurprised if most politicians were incapable of explaining the function of the Bank of England at all. Therefore, the views of people with experience and understanding ought to be taken seriously.

Sure, the Chancellor’s opinion should carry some weight, but not more than the views of the central bankers. To those of you who think that this article is calling for an erosion of democracy, I say this: the job of the Bank of England is to respond to politics rather than being at the centre of it. Why should politicians who make their careers out of criticising or praising woke stances be able to decide things they know nothing about?

I see this whole debate as slightly pointless. The Bank of England is not going to change for the foreseeable future. With the pandemic and Brexit, politicians are focussing elsewhere. Oh well. If I can’t solve this, I guess I’ll go back to thinking about dating.