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Our ConservativeHome Manifesto, published two years ago, inveighed against financial repression – “the name given to policies that are designed to suppress interest rates and encourage inflation”, as we plainly put it.  In a nutshell, low inflation and – up to a point – high interest rates help poorer people, because they reward saving and, by helping to keep asset prices low, ease the path to buying homes.  Financial repression makes Eden’s vision of a property-owning democracy and Thatcher’s doubling of share-owning households impossible.  It has particularly harmful effects on economies that tend to double down on consumption and debt – such as ours – especially when housing is expensive and productivity low.  Thrifty older people and toiling younger ones are hit especially hard.

Spendthrifts are rewarded; the prudent punished.  In the last resort, the objection to financial repression is moral, wonderfully caught in Kipling’s The Gods of the Copybook Headings: “In the Carboniferous Epoch we were promised abundance for all,/ By robbing selected Peter to pay for collective Paul; /But, though we had plenty of money, there was nothing our money could buy, /And the Gods of the Copybook Headings said: “If you don’t work you die.”

None the less, there is a catch in casting financial repression away, at least in present circumstances.  It was put in place for a reason.  Cynics will say this was to inflate away the value of the debt that politicians have themselves run up.  A clearer-eyed view is that it was introduced to prevent the opposite of Weimar-type inflation: that’s to say, 1930s-style worldwide depression.  In the aftermath of the financial crisis, high interest rates would have felled the economy to the floor and kept it there.  Companies would have found it impossible to borrow.  Bankruptcies would have soared, and unemployment with it.  There was a real risk of a slump.  You may well reply, and not without reason, that this point has passed – and that the Bank of England should be raising interest rates, or at least not cutting them.

Which brings us to yesterday’s decision by the Bank, and what might be called the St Augustine view of quantitative easing: give us savings, Lord – but not yet.  A reason to postpone weaning ourselves off financial repression somehow always appears.  Sometimes, it is low growth abroad.  Nearly always, it is intimately connected with the plight of the Eurozone – currently somewhat under-reported.

Now, it is all bound up with Brexit.  Put simply, the decision to cut rates to 0.25 per cent – the lowest rate in the Bank’s 322-year history – expand the quantitative easing programme by £60 billion, and print as much as £100 billion more to subsidise Britain’s banks is a gamble on staving off a downturn.  Much of the commentary on the economic effects of Brexit is over-blown, by cheerleading remainers and gloomster leavers alike.  Little more than a month has passed since the referendum.  It is simply too early to get a reliable glimpse of the landscape.  But the essentials of Brexit endure – what this site always described as short-term pain for medium-term gain.  Business hates uncertainty (as we all tend to do).  Uncertainty means that decisions to invest and expand postponed, as companies bite their nails, draw in their horns, and wait for news.  The danger is that talk of a downturn becomes a self-fulfilling prophecy.

There is a case for arguing that the Bank’s decision is wrong.  It can find no evidence of a fall-off in consumption, notes that the FTSE indexes have not collapsed (far from it), and no longer expects a recession. “I say unto you, that likewise joy shall be in heaven over one Carney that repenteth, more than over ninety and nine just persons, which need no repentance”.

None the less, I have some sympathy for its position.  In a nutsell, the British people knew what they were doing on June 23rd.  They understood that Project Fear was a heap of horsefeathers.  But they also grasped the point about trading the short-term for the medium-term – in other words, striking a bargain whereby short-term growth is traded off for more control, longer-term growth and prosperity (if government doesn’t mess up) and lower immigration.  The Bank is hedging to help ensure as best it can that its latest forecast turns out right: that downturn doesn’t happen.  It is risky.  The logic of financial repression is that, like some drug dependencies, the more you do it the less effect it has.  And savers will have less to spend – one of the paradoxes of the policy.  But there is a political logic in seeking to ensure that the short-term pain is eased with a shot of morphine.

Perhaps the right question to ask at present is not when financial repression will end; how low interest rates should plunge or how high government borrowing should soar…as what Theresa May’s new Government should do in the circumstances that the referendum has given it.  She said in her campaign launch speech that although there’s been a lot of public service reform, “it is striking that, by comparison, there has not been nearly as much economic reform”.

What might that reform look like?  It isn’t hard to see the direction she wants to travel, much of which is to do with raising the quality of the economy.  This means building more homes, so people can move more easily to where jobs are.  It also means removing the need for them to shift in the first place.  So she needs to set out what will succeed George Osborne’s Northern Powerhouse ideal – that’s to say, his vision of linking up our big cities in the midlands and north, in part by devolving more power and control to them.  Much was done under the Coalition to provide more apprenticeships.  May should be mulling the major resource shift to vocational education that we proposed in our manifesto as part of her industrial strategy.  This would have the benefit for her of helping to make it clear that this plan is not all about “picking winners”.  Her tax cutting priority should be phasing out taxes on jobs.

Sure, if the demand-side framework within all this takes place is faulty, the money to help fund it simply won’t be there.  But much of it is about supply-side reform: regulation, planning, devolving decision-making, what’s taught in classrooms or on work experience or in apprenticeships.  All this is relatively easy to plan for amidst the uncertainty that the usually risk-averse British people have plumped for.

57 comments for: Why the Bank of England’s interest rate decision was right. And how the Prime Minister can inch towards her social reform economy.

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