June 1, 2024 - 1:00pm
The snap election that the Government has called for on 4 July is already making the British public tired and cynical, a fact thats not helped by the Prime Minister telling outright falsehoods.
This week, Rishi Sunak has told the public that if he was elected, interest rates would come down. This is an insult to the intelligence of the voting public.
Firstly, the Government does not control interest rates â the Bank of England does. Secondly, and relatedly, the Bank sets interest rates in line with the current inflation rate, which is influenced largely by global economic forces. Recently, inflation rose and fell in line with the shock to energy prices caused by the sanctions and counter-sanctions induced by the war in Ukraine. In April, the rate of inflation in Britain fell to 2.3%, close to the Bankâs target of 2%. Unless inflation reverses, this means that interest rates are coming down regardless of who is elected.
The only situation in which a government might influence the rate of inflation is if it ramps up spending dramatically without offsetting this spending with tax increases. This is what we have seen recently in the United States with the Biden administrationâs Inflation Reduction Act. Predictably, at 3.4%, inflation is running hotter there than in Britain.
There is no possibility that Labour could undertake such unfunded spending, however. If it did, the bond markets would react in the same way that they did to Liz Trussâ mini-budget, leading to a potential collapse in the Starmer government. This is widely known in Westminster and so any notion that Labour would commit fiscal suicide is fanciful.
The politics of interest rates are difficult to assess because, given the apolitical charter that the Bank of England was handed in 1997, it is not supposed to be political. Indeed, the entire premise of central bank independence is that monetary policy will be conducted in such a way that it is not impacted by which party is in power. By politicising interest rates, Sunak has subtly undermined this pillar of the Bankâs independence mandate. The Bankâs independence is already being called into question as it haemorrhages losses on its bond portfolio due to the unwinding of its QE programme â losses that the taxpayer is currently covering.
When he announced his promise to lower interest rates, Sunak positioned himself as a politician with a big vision. âKeir Starmer gave yet another half-hour speech the other day with not a single new idea in it,â he said. â[He] doesnât have the courage to tell people what he wants to do if he becomes prime minister. He doesnât have any big ideas, doesnât have a plan.â The grim truth is that both parties are completely out of ideas, and voters are aware of this. Now the Whitehall-Westminster blob is starting to cannibalise its own institutional credibility.
Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics
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SubscribeTony Blair and Gordon Brown surrendered democratic political control of monetary policy with no electoral mandate to do so. Take Back Control.
The British public has been tired and cynical for some time – ever since Blair, probably. Weapons of Mass Destruction? Really?
The acrobatics over Climate Change, Net Zero, and Covid have not reduced the glut of cynicism.
Err…inflation has mainly been caused by printing money, which most recently happened under the watch of the then Chancellor, one Rishi Sunak. Print money…get inflation…it’s not difficult to understand.
And the Bank of England was never truly independent anyway, despite what the various governments pretended.
Why? Because it is the only fairly firm positive bit of economic data Rishi can grasp and sell, even if it is the Bank’s remit. If Rishi was a true Thatcherite and iconoclast, he would call out the horrendous performance of the BoE – QE splurge, sustained zero interest regime, ESG bollox and worst – not understanding that inflation could happen if you stop an economy for two years..doh…and reform it!! Attack and reform the Bank, the dud regulators, the imperial Treasury and Unfit chaotic Home Office. But of course it wont happen. The Tories are passive Quisling slaves to the Progressive Order…so on it goes.
Well… I’m not so sure. Many will be aware that the BoE sets interest rates, but there’s nothing like a digestible soundbite, right?
Note sure about that either – the Tories came out with National Service and are proposing getting rid of National Insurance, two novel policies right there.
Labour will force private schools to pay VAT and make energy carbon free by 2030, apparently. New policies, even if they are ridiculous.
The problem here is that yes, the public are tired and cynical of these people – the real rot started with the attempts to block Brexit, and let’s not forget it was Starmer who was calling for a second referendum.
Good of you to mention Brexit. One of the key reasons we are in such a mess. What a shambles it’s been. Growth rate one of the poorest in the G7 (Germany done worse but France & Italy much better – doh!). And then of course Brexit almost completely crowded out proper thinking on whole range of other challenges. Own it.
If – and itâs a big if – Brexit has had any significant effect, then that is probably down to constant energy-sapping attempts by MPs and the Civil Service working to undermine planning for – or actually intelligently implementing – the referendum result. When the subterfuge dies away, there will some basis for judgement calls on the economic effects of leaving the EU. I suspect I will not live the extra 20 years needed for that to happen.
The UKâs gdp growth rate is 3x Franceâs (and double Italyâs).
Since 2016 the gap between the UK and French gdp has grown larger as Britain has pulled away from the moribund French.
Despite Brexit! as they say.
Brexit has had little discernible net economic effects. Not even exports into the EU’s own protectionist bloc – the one thing we’d expect to see collapse – have been significantly reduced.
What has reduced a lot – as per the predictions of pro-Brexit economists – is that we import a lot less from the EU due to import substitution, because we are now able to access a range of goods at world prices rather than the higher prices that were forced upon us due to the Customs Union. This effect has, admittedly, been swamped by the effect of the pandemic and the Ukraine War, but it’s still in there, making the hugely inflationary effects of those two things slightly less bad than they otherwise would be.
Interest rates and inflation have been politicised for ever. When inflation was high recently Rishi made a promise to get inflation down and when inflation fell back he took the credit. (Arguably, by not giving in to public sector pay demands whilst the inflation shock persisted, a 70s style price inflation – wage increase spiral was prevented. So in some ways he does deserve some credit, but I suspect 99% of the public don’t understand that and he’s never going to say I prevented a rerun of the 70s by impoverishing public sector workers.)
Going further back, into the 2000s, house price inflation was effectively ignored, so that CPI inflation was at 2% or less whilst houses, the biggest thing most people ever buy, were going up at 10+% pa, sometimes much more, allowing interest rates to be lower than they would otherwise be, boosting the economy. Which of course Brown and Blair took credit for and most people believed them.
An undisputed bit of history from 1997, and it has disappeared. Honestly, what do I pay this site for?
I’ve also had a very plain comment just vanish. It’ll be back later I expect – i don’tthink it’sanything to do with content. The site can be strange at times.
Hasn’t reappeared, though it is there if you view comments by age (without voting buttons). Here’s the comment anyway –
Interest rates and inflation have been politicised for ever. When inflation was high recently Rishi made a promise to get inflation down and when inflation fell back he took the credit. (Arguably, by not giving in to public sector pay demands whilst the inflation shock persisted, a 70s style price inflation â wage increase spiral was prevented. So in some ways he does deserve some credit, but I suspect 99% of the public donât understand that and heâs never going to say I prevented a rerun of the 70s by impoverishing public sector workers.)
Going further back, into the 2000s, house price inflation was effectively ignored, so that CPI inflation was at 2% or less whilst houses, the biggest thing most people ever buy, were going up at 10+% pa, sometimes much more, allowing interest rates to be lower than they would otherwise be, boosting the economy. Which of course Brown and Blair took credit for and most people believed them.
I don’t really care what Sunak is saying, but interest rates are inherently political. They are set by an “independent” (i.e. democratically unaccountable) body, yet are the single most consequential function of government.
Why should the BofE be immune from politics? The decisions it takes affects the entire economy and finances of every individual in the country, so why should it be immune from accountability? Bring it back under political control and make those making decisions answerable to the public. Itâs not as if its independence has led to any great outcomes.
We had over a decade of rock bottom rates pushing house prices out of reach of large numbers of hard working families, then a bout of double digit inflation to round it off
Of course money should be under control of the elected government which is accountable to Parliament and ultimately the electorate.
The supposed independence was only control hidden from public view, and taking no heed of consequences.
Any sensible government would return control of interest rates the Chancellor but it won’t happen because they don’t want the obvious responsibility when things go wrong.
Sounds like the Author completely out of ideas too.
Nothing new here, and nothing offered.
What was the point of Sunak’s government? What has he actually done to improve the lot of the British public? We were told the adults were back in the room (few believed that), and sure enough the public are treated like children.
Everything he touches turns to s-i-. The sooner he, Hunt, and the rest of his crony, authoritarian, wets are gone, the better.
I don’t think it really matters any more does it?
The Tory party isn’t just going to lose this election, it’s going to be substantially destroyed as an electoral force. Sunak could literally promise pies in the sky and it wouldn’t move the dial.