Is the Bank of England participating in another round of Project Fear?

Is the Bank of England participating in another round of Project Fear?

Debt is a major potential problem for the global economy. With global debt running at a multiple of global GDP, economic instability is always just around the corner.

The public deficit in the UK has been cut over recent years so that the rate of growth of public debt has slowed, while private debt is still running high.

This has been partially fuelled by access to cheap money, something which the Bank of England (BoE) encouraged by “printing” electronic money during the financial crisis and by introducing unprecedented, historically low interest rates. The Bank has placed few restrictions on lending.

The financial collapse which precipitated this was caused entirely by the financial services industry and in particular the banks, aided and abetted by lax government regulation. Those who have suffered the worst effects have been ordinary savers with poor returns on investment and entrepreneurs, unable to access business finance.

Those who benefited most were the banks who survived as a result of the generosity of taxpayers (including from those taxpayers who themselves suffered) and those who benefited from QE asset inflation.

It is ironic, therefore, that the current prescription of the BoE is to unravel easy debt by raising interest rates, just at a time when the road to Brexit has the potential to benefit us all, but most of all the poor, the regions and entrepreneurs. The very people who most suffered from the financial crisis will now be punished again by the BoE.

Low interest rates enable a smooth transition to Brexit by supporting business investment and consumer spending. A slightly higher inflation rate, the ostensible reason for a rate hike, will help reduce the public debt burden and drive wage increases, despite the downward pressure created by an unlimited supply of cheap labour from the EU. Most importantly, low interest rates help maintain a competitive currency rate, thus boosting exports, manufacturing (which accounts for half of exports) and, as a consequence, the rebalancing of the economy towards the regions.

The BoE’s policy of raising rates will thus not only punish an innocent group in society once again but will do this doubly by jeopardising some of the transitional advantages that the road to Brexit has provided.

What is most galling about this is that the BoE’s approach is self-fulfilling: blaming Brexit for potential ills that require a pre-emptive rate rise, which will itself reduce the positive impact of Brexit and thus justify the Bank’s action – a convenient recipe if you are an organisation at the centre of the establishment Remainer camp and determined to make sure that Brexit is perceived not to be a success.

The perfect end to this perfect storm is the maintenance of the status quo: the preservation of the advantages that the vested interests currently enjoy. Never mind that the cake shrinks, better make sure the slice is bigger.

Rate rises will have to come eventually, but they should not arrive until a decent interval after Brexit is complete. That may be after March 2019. If there is transition, it should be after that. When the rise transpires, it should be clearly signalled and in baby steps.