The problem with the Bank of England
The Bank of England’s policies are redistributing wealth. But that’s not what it is supposed to be doing, says Merryn Somerset Webb.
I've written before about the way in which quantitative easing (QE) and very low interest rate policies redistribute wealth,and how that isn't necessarily a good thing.
Ros Altman has more depressing figures on the matter. She has analysed the Bank of England's statistics on interest rates in mortgage and savings markets since 2007 with a view to calculating the losses and benefits of super-low interest-rate policy. The results show much what you would expect.
Anyone with a tracker or a standard variable rate (SVR) mortgage of £100,000 is paying around £3,300 a year lessthan they were in 2008. That means that around one third of households (those with mortgages) have effectively been given a huge income boost since the financial crisis began.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
On the other side, savers have done predictably badly. If you have £100,000 in a cash Isa, you are making £4,250 less than you were back in December 2007 (you used to get on average £5,350 a year, now you get £1,090).
This isn't a perfect way to look at it who knows where interest rates would be if they were allowed to be set by the market rather than by central planners. But it makes a clear point: our monetary policy is set specifically to benefit one group of the population above others debtors above savers.I'm not sure that's a good idea.
Back in 2009, Masaaki Shirakawa of the Bank of Japan made a much ignored speech in which he mentioned just this issue. He talked about the unconventional monetary policies the Japanese government had put in place, and then about the lessons to learn from them alongside the reasons for his reluctance to indulge in much more QE, or in Western-style QE.
"When central banks try to create 'productive' policy measures, in an environment where the effectiveness of traditional monetary policy is constrained, they naturally come close to the area of fiscal policy. As a result, the policymakers need to face up to the issue of who should be responsible for such policy actions in a democratic society."
Later in his talk, he made the same point there is a "fine line between monetary policy and fiscal policy."
There are two points here. The first is that monetary policy is not supposed to redistribute resources just to keep interest rates at a level that keeps inflation knocking around 2%. When monetary policy comes close to being involved with the redistribution of resources on a micro level, it is almost a fiscal policy.
The second is that once we have recognised that, we need to face up to the issue of who should be responsible for it. In a democracy, the answer is the elected representative body.
So, here is one of the problems with today's Bank of England: it redistributes income and wealth as part of policy rather than as a side effect of policy, but it does so as an unelected body.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
-
Review: The Store, Oxford – purveyors of excellence
MoneyWeek Travel The Store is a luxurious, new hotel in Oxford that has set up shop in a former department store in the heart of the city
By Chris Carter Published
-
Seven ways the Budget could hike inheritance tax or capital gains tax at death
Chancellor Rachel Reeves could target death taxes by raising IHT and/or levying CGT on inheritances. We look at some potential moves in the Autumn Budget
By Ruth Emery Published
-
Beating inflation takes more luck than skill – but are we about to get lucky?
Opinion The US Federal Reserve managed to beat inflation in the 1980s. But much of that was down to pure luck. Thankfully, says Merryn Somerset Webb, the Bank of England may be about to get lucky.
By Merryn Somerset Webb Published
-
Rishi Sunak can’t fix all our problems – so why try?
Opinion Rishi Sunak’s Spring Statement is an attempt to plaster over problems the chancellor can’t fix. So should he even bother trying, asks Merryn Somerset Webb?
By Merryn Somerset Webb Published
-
Young people are becoming a scarce resource – we should value them more highly
Opinion In the last two years adults have been bizarrely unkind to children and young people. That doesn’t bode well for the future, says Merryn Somerset Webb.
By Merryn Somerset Webb Published
-
Ask for a pay rise – everyone else is
Opinion As inflation bites and the labour market remains tight, many of the nation's employees are asking for a pay rise. Merryn Somerset Webb explains why you should do that too.
By Merryn Somerset Webb Published
-
Why central banks should stick to controlling inflation
Opinion The world’s central bankers are stepping out of their traditional roles and becoming much more political. That’s a mistake, says Merryn Somerset Webb.
By Merryn Somerset Webb Published
-
How St Ives became St Tropez as the recovery drives prices sky high
Opinion Merryn Somerset Webb finds herself at the epicentre of Britain’s V-shaped recovery as pent-up demand flows straight into Cornwall’s restaurants and beaches.
By Merryn Somerset Webb Published
-
The real problem of Universal Basic Income (UBI)
Merryn's Blog April employment numbers showed 75 per cent fewer people in the US returned to employment compared to expectations. Merryn Somerset-Webb explains how excessive government support is causing a shortage of labour.
By Merryn Somerset Webb Published
-
Why an ageing population is not necessarily the disaster many people think it is
Opinion We’ve got used to the idea that an ageing population is a bad thing. But that’s not necessarily true, says Merryn Somerset Webb.
By Merryn Somerset Webb Published