Another interest rate looms, but Britain doesn’t need this one either | Philippe Inman


NOTThe following month brings the likelihood of a 0.25% interest rate hike from the Bank of England, and possibly two more over the rest of the year, as Threadneedle Street seeks to rein in overheating of the British economy.

At least that would be the reason if the economy was overheating and needed higher interest rates. In fact, the central bank is simply proving weaker than it was in 2011, when inflation jumped to 5% and investors, fearing that prices would incentivize workers to demand exorbitant wages, called for action. Interest rates then remained at historically low levels.

The logic of the position adopted by the Bank last year – that inflation would be temporary and of external origin, and for this reason beyond its influence – was reminiscent of that of 2011. And given the underlying weakness of economy, this same logic still applies.

Of course, inflation is a problem for households that face higher food and utility bills, and especially for poorer households that have mostly missed homework. They did not save large sums during the pandemic. To solve this problem, why not reinstate last September’s Universal Credit cut? Its withdrawal represented a loss of around £1,000 a year, and the money would easily offset the intangible costs of Covid as well as the more tangible increase in the gas bill. Meanwhile, the more affluent can afford higher prices.

The Bank is only worried about the average worker’s response to inflation and whether it will be characterized by soaring wage demands – leading to higher incomes this year and next. There is little evidence of this, and it seems implausible when so many companies have managed to drive wedges between their workers, depriving them of any possible collective action.

What about exorbitant vacancy rates? Were they not supposed to force almost all employers, including those running away from unions, to pay megabucks – protecting workers against inflation and perhaps offering a little more on top of that?

On this point, the Resolution Foundation has gathered the latest data from the ONS surveys on online job vacancies. In October, transport and logistics companies were looking for around 350,000 workers. By January 6, that number had dropped to 200,000.

Similar declines in demand were seen in restaurants, hotels and construction, dropping another 150,000 out of a total of 1.1 million job vacancies.

It is true that Omicron has played an important role in the decisions made by employers regarding the need for additional staff during the holiday season. Yet there was also something more fundamental going on, as foundation director Torsten Bell puts it in an accompanying analysis, arguing that a disorderly reopening of the economy was always going to cause temporary job mismatches. , adding that over time, “capitalism is pretty much in place to adapt to changing demands.”

If not, how is the economy overheating? The focus is on the latest GDP figure, which shows the economy surpassed its pre-pandemic level in November and, after an Omicron drop that will affect December and January figures, appears to be recovering once homework completed in February. .

You’d think the Bank would take a little deeper look at why the UK economy has grown, rather than just focusing on turnover, because it’s far from a simple story of achievement, or “a testament to British courage and determination”. people”, as the Chancellor would like.

This is largely due to massive increases in health spending over the past two years that countries with larger, better-funded health systems – France and Germany, for example – needed less of. Building a Nightingale Hospital fuels GDP, as does mothballing and deconstructing the same shed and beds. It makes no difference to statisticians that the temporary hospital remained unused.

Consumers played an important role in the recovery, while businesses remained largely dry, holding back investment until the outlook was clearer. But without business investment, recoveries typically lack the momentum to sustain them and quickly falter.

Then there are the tax hikes in April that will hit employers and households – primarily the 1.25% hike in Social Security, but also the freezing of income tax thresholds.

The only dissenting voice on the Bank’s monetary policy committee is Silvana Tenreyro, a former professor at the London School of Economics. She argues that higher prices and tax increases will have their own moderating effect without the committee needing to change course. She makes a good point.


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