Thinking the Unthinkable? Perhaps Now is the Time to Rethink Monetary Policy? 

By Sarah Walker-Smith, CEO Ampa and CEO Shakespeare Martineau 

The political and humanitarian crisis developing in Ukraine, so closely on the back of other desperate situations in countries such as the Afghanistan and Syria, to name but two, are manmade tragedies beyond comprehension for those of us not directly involved.  

Closer to home we have our own (albeit not as life-changing) issues to deal with as the bow waves of the world context hit us. This is adding layers of complexity to the scars of the last few years and creating a complex economic and social landscape. 

Tomorrow the Bank of England Monetary Policy Committee will meet to consider whether to increase interest rates in the face of rapidly spiralling inflation against its two percent target. 

It strikes me that this is a simple, blunt instrument, a singular prescription which is no longer effective in today’s context (much like a ‘course of leeches’ – a reference fans of Black Adder II will get and the rest of you may not!) 

“The interest rate lever feels as blunt as ‘a course of leeches’ when viewed in today’s context” 

The simple reason for this is that it is designed to deal with inflation caused by spikes in demand. The current issues are not derived this way. The interest rate increase ‘medicine’ may now be treating the wrong problem.  

“Our current issues are complex and growing and essentially supply side; the likes of which we haven’t seen in recent years” 

Of course the Bank of England have other mechanisms available such as increasing retail bank reserve levels or selling/buying bonds; all designed to take money out of circulation and stifle demand (quantitative easing was used extensively in the financial crash of 2008 and again at the start of the pandemic – the reverse of this is to sell the bonds bought at the time). 

It’s an unprecedented recipe. Take the climate crisis, add Brexit (remember; the thing we used to speak about incessantly 3 years ago; the effects are still with us), layer on the impact of a two-year global pandemic. Sit this alongside, the failure of the energy price cap mechanic in context of the wholesale gas changes, the hike in price of crude oil (higher prices ever this week at the petrol pump– although a slight glimmer of hope with Brent yesterday dropping to $99). The NI increases about to hit. ONS stats this week showing that real wage increases are negative for the last qtr. And there are still fewer people in work than before the pandemic; although this isn’t a reflection of the record number of vacancies. This is though a clue to the heart of the problem; a talent shortage of people and skills; partly due to Brexit, exit from the workforce due to the last two year. In some sectors we are seeing a war for talent with eye-watering salary hikes on offer to move role and large signing-on bonuses. 

The rapid escalation of the war in Ukraine has taken the above to a new level. Like pouring fuel on a smouldering fire. Even the figures produced last week re the outlook (which showed circa 8% inflation by April then dipping, fall in GDP but back to growth in 2023) are already out of date. The statisticians can’t keep up with the changes and business confidence is in falling quickly in the wake of this uncertainty 

“I’m afraid Andrew Bailey’s calls in February for workers ‘not to demand large wage increases’ won’t cut it” 

With a supply side inflationary spike, raising interest rates could be another push towards recession; which in turn will also hit those in lower paid jobs and further reduce government coffers at a time when they are seeking to start to reduce the deficit built up over the last two years.  

“I think of myself as an optimist; but even I am doubting current ability to get out of this with the same old game plan” 

Given the root causes driving inflation this time (the supply of materials, energy and talent) an increase in interest rates will simply add to the problem. We need to incentive both urgent and longer -term investment and confidence instead to create supply of the resources that are scarce.  

Higher inflation may be a price we may need to live with for a time especially when we consider this is a global issue and therefore won’t have the usual challenge of international competition on exports and exchange rates as it would if it were a local problem.  

 ”The 2% inflationary rule does not serves us at present; our metrics need to shift to growth not inflation” 

It’s easy to criticise isn’t it but what could we do … 

This time last year I wrote an article entitled ‘The Economics of &’ ; perhaps increasingly relevant in the heightened situation. And in addition, I make no apology for suggesting some other ‘unorthodox’ further ideas below. This is the time to think and act bravely. 

• Is it time to rethink the separation of the Bank of England MPC decisions? Unthinkable? I was a big supporter of this move at the time of devolution but now I’m not certain of having one key dimension of monetary policy floating in isolation away from the other levers we can pull. Could a combined think tank across government, higher education, central and retail banks and business recommend policy; including interest rates. 
• We need a cocktail of joined up measures which solve the supply side problems in tandem eg. green investment and infrastructure changes (both privately incentivised and public sector refocused spending), bringing talent and workers back into the country from regions of the world who need help and those fleeing conflict or objecting to aggression for their own nations.  
• Focus this investment on the regeneration of city centres with universities, business, banks and local government working together in ‘co-opertition’ across political boundaries and business rivals.  
• We know from the excellent work done by Sarah King and Claire Dunn at we are radikl, that less than 1% of investment funding goes to female entrepreneurs – levelling this playing field by extending and improving the SEIS and BEIS schemes will add hundreds of millions to GDP (see also the Alison Rose report on this topic). 

• Urgent incentivisation of digital infrastructure investment across the country and government support for rapid development ion skills in this area, retaining those who have lost roles in dying sectors. This goes faster and beyond the  
• Perhaps for a time measuring input measures like investment and employment should be the priority over GDP and inflation? 
• And critically, long term policy which transcends political tenure and therefore builds certainly for longer term private sector response and confidence  

“Joined up policy, intelligent investment and a spirit of collaboration and coopetition are the way out of this” 

It will be interesting to see tomorrow if, within their currently constrained remit, the MPC at the Bank of England have managed to come up with something more imaginative than the modern day equivalent of the ‘course of leeches’.  

I wait in hope and with baited breadth …