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The Bank of England fails us all, again | accountingweb
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What goes up should have come down

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The Bank of England’s decision to raise interest rates yet again will just make the economic outlook for the UK even more bleak, says Richard Murphy, who has called on the Monetary Policy Committee to cut rates by 1.5%.

23rd Mar 2023
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The Bank of England’s Monetary Policy Committee (MPC) had a range of simple decisions to make today. The MPC’s job is to control inflation keeping it at, or close to, 2% per annum. No one is quite sure what the particular virtues of that figure is, but it has been chosen and that is what the MPC is tasked with doing.

To achieve this goal it can do three things. First, it can increase or decrease the base rate of interest that the Bank of England is willing to lend to banks at and which it will pay on the deposits that those banks hold with it, now totalling around £900bn in all. 

Second, it can inject more government-created money into the economy via the quantitative easing (QE) process if it thinks that appropriate. It would do so in two situations. They are, firstly, if the economy is at risk of flatlining or entering recession, meaning inflation was likely to fall below target. Alternatively, they would do it if the banking sector was at risk of a liquidity shortfall. 

Third, it can undertake the little-known and even less-tried option of quantitative tightening (QT), which is the reverse of QE. This process withdraws government-created money from the economy. This reduces the level of credit in the economy by reducing liquidity in the banking system. That is likely to put a brake on the economy and so is deflationary. It also increases the risk of bank failure. 

Not rocket science

What was needed from the MPC today was obvious. In both the February report from the MPC and the more recent Office for Budget Responsibility (OBR) report on the economy issued with the Budget it was made clear that inflation will tumble this year. The MPC said today that they now expect this to happen even faster than previously expected. 

That forecast is not based on rocket science. Inflation is the difference between the price of a bundle of goods this year compared to the price of the same bundle last year. Given that we know that current inflation was caused by Covid reopening, which has now passed, and the Ukraine war, which began just over a year ago, the shock from both is going to fall out of the calculation of the inflation index over the next year. That index is bound to fall as a result. In fact, there is real risk that it will be negative in 2024.

Meanwhile, growth on gross domestic product was also forecast by both bodies to flatline at best over the next five years. Official forecasts say that stagnation is the best that can be hoped for now. 

And since the OBR prepared its forecasts a new banking crisis has emerged. That is because of a shortage of interbank liquidity among other things, which is the very thing that QE has provided and which QT takes away. It is so serious that in the US there is already talk of all deposits in smaller US banks having to be subject to government guarantee, without limit. In effect, private sector risk will be removed from banking as a result, so serious is the crisis.

Worse though, taking money out of the economy, which both QT and raising rates do, means there is less cash in the banking system. This might be acceptable if the risk in the banking system had not increased considerably as a result of the current banking crisis, but it has. 

Lack of liquidity 

US banks have failed because of a lack of liquidity and the resulting risk of shareholder deposit runs. Janet Yellen, the US Secretary of the Treasury, is as a result in effect of saying that private capital can no longer support banks, which is a quite staggering suggestion.

In Switzerland Credit Suisse has supported her claim. It could not sustain its business, any more than it could apparently prepare proper consolidated accounts, according to PWC, its auditors. And UBS believed that suggestion: it required SFr10bn (£8.8bn) from the Swiss government to cover for unknown holes in the CS balance sheet. The days, supposedly last seen in 2008, when no one could be sure what the scale of unrealised losses on bank balance sheets might be are apparently back again, and big time. Much of that is, of course, because of the artificial inflation of interest rates by central banks like the Bank of England that has in turn artificially deflated the value of financial assets.

To tackle these issues Prof Danny Blanchflower and I called on the MPC to cut interest rates by 1.5% today. We also said that they should confirm that they had cancelled QT and were considering a new round of QE of at least £50bn a year to provide the liquidity markets need. Blanchflower was a member of the MPC from 2006 to 2009, and alone among its members called out the 2008 crisis before it happened. 

Warnings ignored

The Bank of England has ignored the warnings. It has increased rates again. The aim, as former deputy governor of the Bank of England Sir Charlie Bean explained on the Today programme on BBC Radio 4, is to impose a 5% pay cut on the UK to pay for the war in Ukraine. That is not a policy within the bank’s remit, but they are doing it anyway.

A 0.25% interest rate rise will just make the economic outlook for the UK even more bleak.

The actions that Blanchflower and I have proposed would instead have at a stroke removed the pressure on bank balance sheets by increasing the value of assets. They would also have made UK mortgages and rents much more affordable, taking the pressure off millions of households that are currently struggling under a burden of debt. And, most importantly, the economy would have got the economic boost it needs. Inflation would have been unaffected: interest rates have no impact on the sort of inflation we are suffering in this country. 

Our plan was what was required from the Bank of England today.

Instead, the MPC got every one of its decisions wrong. We will live to regret its desperate desire to crush life out of the UK economy, whatever the cost.

Replies (18)

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By Calculatorboy
24th Mar 2023 01:39

Obviously a mad man

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Replying to Calculatorboy:
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By fcbmq
24th Mar 2023 09:04

Calculatorboy wrote:

Obviously a mad man

Let's hear your reasoned answer as to why he is incorrect. Genuinely interested.

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By conwy
24th Mar 2023 10:03

Quite agree with Richard Murphy
The economy needs a boost not a brake
The inflation at present is nothing to do with consumer spending on non essentials but on external factors out of their control
It's going to fall this year irrespective of these interest rate rises which are causing more harm

The Bank of England are applying old fashioned economics not relevant to the situation we are in now

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Replying to conwy:
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By Chris Pittock
28th Mar 2023 11:15

Fully agree.

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David Winch
By David Winch
24th Mar 2023 10:30

At risk of saying something too boringly obvious, the annual rate of inflation to February 2023 (the latest figure we have) is based on the increase in the index over the period February 2022 to February 2023.
Next month's annual rate of inflation will be based on the increase in the index over the period March 2022 to March 2023. So 11 months of that 12 month period is the same as the one before. The change in inflation next month (up or down) is solely dictated by the comparison of the one month that drops out (February to March 2022) against the one month that comes in (February to March 2023).
As it happens there was a fairly chunky rise in February to March 2022 - and an even more chunky one in March to April 2022. So we can be very confident that (irrespective of any action by the Bank of England or the Chancellor) the annual rate of inflation will fall significantly over the next two months.
Who should we congratulate when that happens?

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Replying to davidwinch:
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By Justin Bryant
24th Mar 2023 14:09

It's not necessarily that simple of course i.e. try telling that to a Venezuelan/Argentinian/Zimbabwean/Lebanese etc.

Let's see how accurate these dodgy-looking BoE inflation forecasts are this time next year.

As for RM, no-one sensible takes him seriously (not even Jeremy Corbyn), unless it's for tax avoidance advice for your nanny perhaps.

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Replying to Justin Bryant:
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By AndyC555
25th Mar 2023 12:47

"As for RM, no-one sensible takes him seriously (not even Jeremy Corbyn), unless it's for tax avoidance advice for your nanny perhaps."

I would imagine RM is also a useful 'go to' guy if you're looking to get grants from charities.

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By moneymanager
24th Mar 2023 11:39

The economy would receive a massive boost if a whole host of non fiscal measures were carried out, we could for instance see the self eviscerating consequences of "Net Zero" which is more a religion than a rational science, the inflationary and business damaging consequences of the perversion of the term traffic management which used to mean the sensible facilitation of flow and now seems to imply inhhibition, sticking my neck out, the "war" in Ukraine has far deeper origins than are readilly admitted and we should not be promoting war in the way that we are and, lastly, we should be pursuing the criminal activities of the pharmaceutical industry and demanding a refund, as have some in the EU, for all their failed "Covid" interventions and the consequences there of; only a fool continues to repeat the smae thing expecting a different result, it's time for a serious change of both politics and economics.

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Replying to moneymanager:
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By Postingcomments
24th Mar 2023 15:36

Of course, there is no hiding from all these agendas even on a website that is supposedly about accounting.

eg The front page now - articles about Net Zero, mental health, inclusivity etc etc

It's the same everywhere. There is no escaping having these narratives pushed at you wherever you go.

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John Hextall
By John Hextall
24th Mar 2023 12:46

I thought he was very entertaining on the radio this morning. Simultaneously telling companies not to increase prices as that would surely cause more inflation whilst increasing the price of his own product by 6.25% which, being money, surely defines the price of everything else? Also claiming to know that inflation was going to come down sharply this year on the basis of absolutely no evidence. When asked to justify this belief, or any of his suggested remedies, he just made up nonsensical expressions, many of which approached the heights of concrete poetry. It reminded me of those wonderful old Bird & Fortune sketches from 25 years or so ago.

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Replying to John Hextall:
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By AndyC555
25th Mar 2023 11:16

"Also claiming to know that inflation was going to come down sharply this year on the basis of absolutely no evidence."

Back in 2021 he wrote a series of articles about how we had nothing to worry about from inflation as it wasn't going to be a problem. The outgoing BofE chief's warning that inflation could be 4% by Christmas 2021 was dismissed as proving he didn't know what he was talking about (Murphy knew better). Inflation was 4.1% at Christmas and note that this was before Ukraine.

Murphy is currently predicting a recession. Since he has predicted one at least twice a year for the last 15 years, he will eventually be right and will then use this as 'proof' of his economic prowess. All the incorrect predictions (such as 600,000 dead from Covid in 2020, 'starvation a real possibility in the UK', 200,000 to die from Omicron etc etc) will be quietly forgotten. Perhaps Covid has affected him? From his blog pronouncements, he was one of the first to catch it in the UK and has since had it at least 3, 4 or 5 more times (it's hard to keep count).

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Replying to AndyC555:
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By moneymanager
26th Mar 2023 19:02

He might be right with the starvation one, we are only some 26% self sufficient but only 16% in fruit and vegetables, one of our largest surces is Holland and although a recent Dutch election has thrown a spanner in the works, mark Rutter is pushing for the "environmentallly require" closure of virtually ALL farms by compuslory purchase if neccessar, and the bulding of the "TRI STATE CITY" which will span westrn Germany and Belgiul, I can't quite understand the sustanability bit of that. In Briatin we are osing farmland to corportate greenhouse gas offset susch as OVO planting 1,000,000 trees a year, green electrcity (dirty electricy plus smoke and mirros) and no food, no thanks.

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By Matt1999
24th Mar 2023 16:37

Why are articles like this on Accounting Web? It seems more suitable for a op-ed in the Guardian.

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Replying to Matt1999:
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By moneymanager
24th Mar 2023 18:10

Unlike in The Guardian you can at least comment, over there you rarely can unless it involves avocados or "social issues", even then your comment may land you in hot water.

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Replying to moneymanager:
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By spilly
24th Mar 2023 21:32

Make that tepid water - got to save energy to stop global warming.

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Replying to spilly:
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By moneymanager
25th Mar 2023 12:17

Too true!

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By richards1
30th Mar 2023 10:39

This all goes back to making money too cheap.

Anything that has little value is not valued.

Cheap money has fuelled a housing boom or two, lulled the population into a false sense of security that you dont need savings as money doesnt earn.

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By moneymanager
30th Mar 2023 17:34

Money out of thin air is the same as, worse than, a pile of fool's gold, the Great Reset is coming, it won't be pretty.

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