Why do we want the Bank of England controlling our interest rates?

I mention this by way of reminding readers that the SNP’s formal position on a post-independence currency remains to keep the pound sterling – even if party conference qualified this by demanding a shift to a domestic Scottish money “as soon as possible”. Which means that an indy Scottish government would be waiting for the Bank of England’s monetary policy committee to set interests rates on December 16.

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Personally, I think relying on the English central bank to set Scotland’s interest, lending and mortgage rates (the latter determining the state of the domestic construction industry) is hardly worth the name independence. For it leaves most key economic policy measures in the hands of London. Some economically illiterate SNP spokespeople have argued that at least fiscal policy (taxation, borrowing and spending) would pass to Holyrood. But that is utter nonsense. If the Bank of England raised the cost of Scottish Government borrowing next week, SNP ministers would be forced to cut social spending programmes.

Some alert readers will remind me that the recent SNP (virtual) conference voted overwhelmingly to support moves to create the machinery for a Scottish central bank, allowing a swifter transition to a separate local currency. Thanks for this positive move goes to the redoubtable Tim Rideout (below), who has fought doggedly against the idea of “sterlingisation”, the proposal in the infamous SNP Growth Commission report that post-indy Scotland should keep the UK pound. Well done Tim.

Except, of course, that the latest SNP conference decision changes nothing fundamental. There is no indication whatsoever that the SNP leadership has had a change of heart over sterlingisation. The plan remains to avoid provoking the banking and financial sector in Scotland – now almost totally under the control of the City of London and Wall Street – in the run-up to any second independence referendum, by seeming to force greater state control from Edinburgh. Also, the party hierarchy are petrified of giving the Unionist media a weapon to mobilise older voters who have pensions – “a falling Scottish groat will half your pension income” etc, etc.

What the SNP leadership and advocates of sterlingisation (eg Andrew Wilson of Charlotte Street Partners) don’t appreciate is that the economic tectonic plates have shifted dramatically since the pandemic. The key new development is the return of inflation. In the UK, prices are rising at 4% plus per annum. In the United States, inflation is running at more than 5%. Ditto in the Eurozone countries. Much of this is down to supply chain disruptions (creating shortages across the global economy) and accelerating demand for scarce energy supplies bidding up gas prices.

READ MORE: SNP back motion to speed up independent Scotland adopting own currency

Don’t think this is a flash in the economic pan. The boss of the US central bank, Jay Powell, told Congress last week that he no longer considers inflation to be “transitory”. That’s central banker speak for saying the global economy is in permanent deep doodoo. US inflation is now at a 30-year high.

SO what? In itself, inflation can have benign effects. Companies are piling up revenues and profits as a result of charging more, which is good for shareholders and pension funds. But inflation is insidious. It eats into consumer demand and lowers real living standards (important in the UK given recent massive Tory tax rises). Above all, rising prices distort the allocation of capital and cause increasing uncertainty for investors. Ultimately, inflation is a deeply disruptive influence, slowing economic growth.

Which brings us back to the Bank of England and other central banks. Since the 1990s, Western central banks have been given primary responsibility to guard against inflation. They do this by raising interest rates. The theory is that raising the cost of borrowing will curb “excess” demand in the economy, causing prices to moderate. Which is why commentators have been predicting the Bank of England is about to increase rates.

But there’s a wee problem – several actually. Raising interest rates may get rid of inflation but it will stop economic recovery from the pandemic in its tracks. Which is why the Bank of England is procrastinating about a rate rise – that and the fact that the present Governor of the Bank of England, the pusillanimous Andrew Bailey (above), is too afraid of his Treasury masters to think for himself. But Bailey can’t hold out forever, especially if the Americans raise their interest rates.

All this suggests a bumpy next few years with no return to economic normalcy. To this we need to add the withdrawal of so-called quantitative easing – the massive boost to the liquidity of financial markets given by central banks printing money, especially since the pandemic began. Expect that quantitative easing to be wound down in conjunction with interest rate rises. The result will be to expose thousands of weak companies to default and bankruptcy, exacerbating the likely downturn.

Why would anyone in Scotland seek independence in this scenario while leaving all the major monetary decisions to a foreign central bank such as the Bank of England? If sterlingisation was a silly notion to begin with, it is now straightforward economic suicide for indy Scotland. With inflation on the prowl and economic uncertainty rising, surely the whole point of independence is for Scotland to control as many domestic policy levers as possible – in our own self-interest.

Traditionally, UK inflation was driven by over-heating of the economy in London and the English south. But to control this inflation, unnecessarily high interest rates were imposed across the whole UK economy. Much of the perceived under-performance of the Scottish economy in the post-war era was not the result of our own weaknesses but caused by this inappropriate interest rate structure enforced north of the Border by the Bank of England, to cure inflation generated in the south. As a consequence, demands for independence arose as a way of taking control of our own monetary policy.

We have ended up in a situation where the present SNP leadership is opposed to the very policy necessity – a Scottish currency – that created the modern movement for independence in the 1960s. Worse, they are maintaining their erroneous support for sterlingisation in the teeth of this new, post-pandemic economic reality where the Bank of England will once again impose an interest rate structure on Scotland that is inappropriate to our needs.

There is no evidence of excess demand in the Scottish economy or consequent rampant inflation. Everything says that we need to raise investment levels in the Scottish economy if we are to match global productivity rates.

The Scottish economy needs more spending, not less. Indy Scotland demands a monetary policy that promotes expansion not contraction. Why then in God’s name do we want the Bank of England to control Scotland’s interest rates?