The Government WILL take back control of Interest Rates, rather than leaving them with the BoE
Posted by markharrison on August 8, 2007
After my article about Market Crashes at the weekend, I’ve had some questions about my comments about Government.
My view remains that interest rates will (again) be set by politicians at some point in the future, but my reasoning is slightly non-trivial.
- When he was Chancellor, Gordon Brown oversaw the transfer of base rate control away from the Treasury, to the Bank of England.
- The purpose of doing this was to demonstrate that he was putting long-term inflation control ahead of short-term political tinkering. (Something that both parties have been guilty of.)
- The BoE is mandated to keep inflation low.
- The BoE will (almost certainly) do a great job of managing this.
The problem will comes later in the market cycle. At the moment, high inflation is seen as a terrible spectre. However, there will come a point (because there always does) when unemployment rises, and mass unemployment is suddenly seen as the bogeyman. After this has gone on for a while, people (newspapers first, then blokes down the pub) will start talking about how “it’s this low-inflation policy that’s costing jobs.”
Once this cry reaches fever pitch, the Government will have one of two choices:
- Take back control over base rates
- Give the BoE a new mandate
This will, of course, be done in the name of democracy, and spun as “good politicians listening to the people, and giving elected officials, the peoples’ representatives better power than faceless bankers.”
Now, what bit of that doesn’t sound like interest rates being used for political purposes, rather than fiscal ones ?