The problem with the Bank of England

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 less than 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.

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.