INFLATION is stalking the land and, imagining itself to be the knight in shining armour, the Bank of England is threatening to come to our rescue. The only trouble is, their plan is fundamentally flawed.
That the UK is suffering rates of inflation not seen since 2011 is undoubtedly true. Supply chain disruption involving gas, food, building materials and some durable products like cars, are all resulting in price increases. This cannot be disputed. There are, however, two questions that this gives rise to. The first is whether this is temporary. The second is whether any increase in interest rates imposed by the Bank of England would help address this problem.
There is almost universal agreement with regard the first of these issues. No-one thinks that the supply chain disruptions that are giving rise to most of the price increases are going to last. There is already evidence, for example, that the shipping problems that have created so many of the delays are resolving. The cost of bringing goods from China is already falling as a result. This inflation is very likely to be temporary in that case. In fact, it could even reverse. For some items like cars and even building materials, where prices are artificially inflated at present, once supply chains are working properly again we might actually see prices falling below 2020 levels next year. Give it 12 months then and it is very likely that this problem will go away. Even bankers seem to agree on that.
In that case why do the Bank of England seem to think that they must increase interest rates now? That is a question that is very hard to answer, because what is glaringly obvious is that an increase in interest rates will not increase the supply of gas, or of food, or of building materials or cars. In other words, increasing interest rates will not solve any of the problems that have given rise to this inflation. Any interest rate increase would, then, seem to be inappropriate.
Worse, any increase would actually seem to be counter-productive. What we know is that inflation is putting pressure on already stressed household budgets. If the Bank of England signalled that interest rates should rise then borrowers, who tend to live with the most stressed household budgets, would simply see the pressure on their ability to make ends meet increase even further. To put it bluntly, those with mortgages, or children, or with personal debts, or who are living on benefits, may well suffer as a result of this interest rate rise, but will see no relief in the consequences of the inflation that they are suffering. The Bank of England would impose a double whammy in that case, whilst increasing the incomes of those with savings, otherwise known as the well-off.
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So why would they do that? The only real explanation that I can offer is that the largely male and universally well-off committee that is responsible for making this decision in the Bank of England thinks that because they have been told to control inflation they must take action now whatever the consequence. In that case, as if this is a proof of their virility, it seems likely that they will increase interest rates even though they must know that this cannot improve the state of the economy. They will claim it is their duty to act, which is utter nonsense. Doing nothing is what is required of them right now.
There is, of course, nothing that anyone in Scotland can do to oppose this increase. Not only is this a decision reserved for Westminster, it is one that Westminster has outsourced to economists and bankers who almost entirely share a City of London perspective on the world. Scotland simply has to suffer the resulting damage.
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However, there are lessons to learn from this, of which the most important by far is that if Scotland is to be independent then it must not make the mistake of outsourcing such decisions to theoretical economists, bankers and members of the financial services community, most of whom are out of touch with the reality of life as most people live it. Interest rate setting policy should not be the preserve of elites. It should be managed by democratically elected politicians who are accountable to a parliament and their electorates for the decisions that they make, especially when they are inappropriate and harmful. When Scotland has its own central bank, as I hope it will, it must not have the power to cause harm, as the Bank of England has at present.
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