A certain lack of interest surrounds this week’s decision by the Bank of England’s Monetary Policy Committee on interest rates and so-called “quantitative tightening”.
I say this not as a “stop reading here” warning to all but central bank obsessives, but to highlight what until recently would have been seen as a rather remarkable development – that monetary policy is again becoming “boring”.
This was always the ambition of Mervyn King when he was Governor the Bank of England – for the Bank’s role in maintaining price and macroeconomic stability to be seen as so dull, repetitive and reliable that it would be largely taken for granted.
A gentle nudge of the tiller here and there would be all that was needed to keep the economy on the straight and narrow.
King’s goal was sadly interrupted by the financial crisis, and it has been monetary fireworks and almost laughably inaccurate forecasting more or less ever since.
So “interesting” did monetary policy become, and so apparently devoid of alternative macroeconomic levers were the politicians, that central banks became known as “the only game in town”. To keep them afloat, economies became almost entirely reliant on a constant stream of free money.
Having failed to anticipate the financial crisis, central bankers were again caught napping by the sudden surge in inflation that followed the pandemic and Putin’s invasion of Ukraine.
This was initially dismissed as merely “transitory”, but almost inevitably proved far more persistent than the “lords of finance” expected, requiring a severe monetary squeeze to rid the system of inflation.
With this objective now broadly achieved, monetary policy is returning to the predictable and dull state of affairs that used to reign before the financial crisis.
The argument is merely about how quickly rates and balance sheet size should be cut, and to what level. Much the same thing can be said about both the Federal Reserve in the US and the European Central Bank in the eurozone.
In deciding monetary policy, we are back to what Sigmund Freud called the narcissism of small differences, where decision-makers are reduced to arguing ever more furiously among themselves about comparatively trivial and unimportant adjustments to interest rates and balance sheet size.
Whether the Bank of England cuts by a quarter of a percentage point, or leaves rates on hold at this week’s meeting, is in practice very unlikely to make a significant difference to the economy, either in the short or long run.
If there is no longer any need for monetary fire fighting, it puts the pressure back on the politicians to come up with alternative, supply-side solutions to the state of near paralysis the economy finds itself in.
For too long they have relied on the anaesthetic of the Bank of England’s printing press for economic sustenance, ducking the difficult decisions needed to boost productivity, education and enterprise and to ultimately generate the resources needed to sustainably raise living standards.
The urgency for such action was laid bare in two reports published last week on debt sustainability – the Office for Budget Responsibility’s “fiscal risks” report, and the House of Lords Economic Affairs Committee’s “National debt: it’s time for tough decisions”.
On present policies, the OBR concludes, the national debt is destined to swell to a jaw-dropping 274pc of GDP over the next 50 years. This is not of course what will happen, because it can’t. It’s a projection, not a prediction or a forecast.
In practice, markets would intervene long before such a threshold was reached; the Government would find itself facing a buyers’ strike in debt markets and the currency would collapse. Like Argentina, the country would be sucked into a succession of fiscal crises, with plunging relative living standards to match.
It’s true that Japan manages to muddle along with public debts which in gross terms are already approaching that sort of level, but structurally Japan is a very different economy with sustained current account and savings surpluses.
Sadly, this is not the case with the UK, which has come to rely heavily on what Mark Carney, another previous governor of the Bank of England, called “the kindness of strangers” – overseas investors – to fund both its budget and current account deficits.
In any event, it has long been clear that we cannot go on like this. To deliver us from the clutches of never-ending austerity and relative decline in living standards, we need growth, and lots of it. On that, virtually everyone can agree, whatever their political views. It is on how to deliver that growth that the argument begins.
Today’s Labour Government talks a good game, but unlike its Blairite predecessor it doesn’t seem to grasp what wealth creation is all about, and on what we have seen of its actions so far looks almost certain to fail.
We should of course wait until Rachel Reeves’s first Budget on Oct 30 before reaching final judgement, but already the promise of an investment-led economic strategy has been substantially watered down, with spending on public sector pay awards taking priority over spending on the green transition and infrastructure renewal.
On the revenue side of the ledger, an expected crackdown on capital gains, wealth transfer, and pension savings is likely only to further undermine already shamefully low levels of business investment. The promised workers’ rights charter threatens to act as a further deterrent.
None of it looks like the enterprise-friendly growth strategy Starmer and Reeves promised on the campaign trail, the need for difficult decisions on the public finances notwithstanding. Caving in to union pay demands was a political choice, not a matter of economic necessity.
We have entered a new economic age in which the power of the central bank to manipulate demand is no longer as important as it was, but the need for radical structural reform to underpin investment and productivity growth has rarely looked more urgent.
Hiding behind the Old Lady’s petticoat is no longer an option, but does the new Government have the stomach for what’s required? Don’t hold your breath.
