In today’s media-saturated environment, news outlets are engaged in a race to the bottom to drive up engagement. As such, un-sexy topics that aren’t conducive to clicks rarely get coverage.
One such topic is the base rate of interest, or the bank rate. This is what the Bank of England charges on single day maturity loans to other banks. Thrilling, I know.
However, this is stuff that matters. The bank rate has the ability to profoundly impact your spending decisions. Suppose the bank rate increases. If your bank is having to cough up more to the Bank of England, it tends to pass the buck on to you. A higher interest rate for your bank means a higher interest rate for you, and your friends and family. Spending across the entire economy should, the theory goes, decrease, when borrowing becomes more expensive. When the bank rate falls, the opposite happens, and the economy can regain momentum.
The Bank of England is acutely aware of this, which is why it uses the bank rate to keep the economy stable. Too much inflation? Hike up the rate to choke off demand. Not enough growth? Slash the rate and watch the economy pick up steam.
That’s what I’ve been told at university, at least. I’ve since come to learn that things are more complicated than they appeared in the dog-eared copy of my economics textbook. Having lived through recessions and broken promises, which we were told were either unpredictable or unpreventable, perhaps I’ve grown tired of business as usual.
The issue with the bank rate is twofold. First, the Bank of England has tired itself out trying to get the economy going. When lockdown hit, the base rate of interest was reduced to a miniscule tenth of a percent, where it has stayed ever since. Almost 11 years to the day before that, it was slashed from 1% to just 0.5% to try and dig the UK out of the 2008 recession.
Instead of getting us out the hole, though, the Bank of England fell into a liquidity trap. Simply put, there’s only so low you can go before the financial world forget you’re there.
The second issue with the base rate of interest is that it’s too broad. When used properly, it can be a powerful tool in the Monetary Policy Committee’s belt to keep the economy stable. However, inflation in urban areas tends to be noisy, and distract from the complete lack of growth in rural areas. Is it really fair to punish farmers and coastal workers with a rate hike that’s only needed in the cities? Similarly, what if the city needs rates cut, but rural areas suffer from (cost-push) inflation?
The regional differences are such that they can no longer be ignored. In 1992, chaos erupted in the UK and on the continent, in part due to the failures of maintaining a single monetary policy across Europe. The UK is comprised of regions whose economic prospects are just as diverse as those of the countries across Europe. The two nations of which Disraeli warned are here, fully formed and entrenched in part by financial mismanagement. The time has arrived for each region of the UK to have the ability to decide what rate its commercial banks will receive.
I’m far from a Conservative, but this is a proposal the government will surely welcome with open arms. Are they not the ones who enthuse about ‘levelling up’ the UK? If the Tories have any real interest in eliminating regional inequalities, they can start by creating regional bank rates, and devolving the power to set them to local authorities.
Featured Image: Bank of England on Flickr