Ann Pettifor

Rates: the BoE is not independent – it has a political mandate

Both the British Chancellor, Alastair Darling and the shadow Chancellor, George Osborne, have been on the radio this morning, resisting the idea that interest rates are political. Instead they have argued, vehemently, that the Bank of England is independent, and that the Bank must decide whether or not to lower interest rates.

First, the BoE is not independent. It is a nationalised central bank. It is owned by the government. By taxpayers. Second, the BoE’s governor, Mervyn King operates under a mandate from the Chancellor – a mandate to prioritise suppressing inflation – over all else.  In other words, at a time of crashing oil and commodity prices, at a time of global economic meltdown, he must care less about small businesses, households and individuals and instead go after a non-existent threat of inflation.

The governor does not have an independent mandate. If he is to do something about lowering interest rates, the government must change the mandate. The political mandate must be changed!

In May 1997, Gordon Brown wrote to the governor, and reaffirmed that the Bank is to remain in public ownership. He then charged the Bank with fixing rate of interest “to deliver price stability – as defined by the government’s inflation target.” (Bank of England’s site – monetary policy committee’s remit.)

This is not independence. Gordon Brown gave the mandate. He is a politician. He is elected by us to act as a guardian of our finances. He can take the mandate away.  Or he can amend it.

Alternatively he can allow borrowers – that owe money on billions of pounds – to continue being bankrupted by high, real rates of interests – crippling borrowing costs. Re-capitalising the banks; throwing money at the problem, as Hank Paulson has learnt to his cost in the United States, will not work. What matters now is that the cost of borrowing must be brought down, so that all those heavily indebted, banks, companies, households and individuals – can breathe, economically speaking.

Right now, their heads are being held below the water by very high rates of interest. Pouring more water down their throats – forgive the ghastly analogy – will not stop them drowning!


4 thoughts on “Rates: the BoE is not independent – it has a political mandate”

  1. What I don’t understand is this:

    Why have we created a debt-based money system?
    Why can’t we have a zero-based money

    system instead?


  2. The problem isn’t so much a high cash rate (and so mortgage rates) now, it’s more that people have

    borrowed too much money. There is too much debt. It seems to be a failure of regulation. Where the regulators asleep lately to notice the housing

    bubble and the debt bubble?

    As for the BoE’s independence. I am not sure about that but doesn’t someone need to give a mandate to the

    central bank? There decisions guided by that mandate, however, _are_ independent, aren’t they?

    A 0.5% rate cut seem pretty significant.

    Mortgage rates don’t seem that high. A lower rate wouldn’t help if you were unemployed (unless the rate was almost zero). The BoE has already cut

    the cash rate to below CPI!! This seems mad to me but I guess it’s a sign of panic at all levels including the govt.

    Not everyone is up to

    their eyeballs in debt. I am a saver who chose not to buy into an already overblown housing market back in the late 1990’s and early 2000’s.

    Frankly, I don’t want to see run away inflation decimate my hard earned savings.

    I don’t know how things can “get right” again without a

    great deal of pain. A new monetary system could be part of climbing out of the ditch.

    Hi Martin, I’m not sure what a zero-based money

    system is but I reckon that people will certainly be thinking about changing the monetary system. If you are interested, I would recommend reading

    about Austrian Economics. A good place to start is the Mises Institute. Perhaps you mean a zero-debt

    system? That would be similar to a fixed fiat system. Perhaps we will return to the gold standard. We certainly need some natural or imposed limits

    of the expansion of money.

    Some people have seen this crisis coming for a long time. I just watched the “Nov 2006 Peter Schiff Mortgage

    Bankers Speech” on YouTube. It’s very useful listening. He is a strong believer in sound money.

    I would really love to understand why the

    govt, regulators and bankers etc ignored these signs. Who is to gain for the current calamity?

    I wish I could say for sure but a sound

    monetary system looks pretty attractive to help prevent these kinds of blow ups in the future.

  3. Hi Steven,

    by zero-based I mean a money system that always resolves to zero – so yes, no debt, and no interest rates. A money

    system that is issued by the state and that reflects our need for money as “a means of exchange” to facilitate trade and “a measure of value” and

    nothing more.

    The debt-based money system is so dsyfunctional that – re. measure of value – the poorest country in the world is the USA

    with combined debts of $15 trillion or so. Gimme a break!

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