Cooking the Books 1 – Rating the Bank Rate
The Bank Rate has gone up to 3 percent. What does it mean? As the rate which the Bank of England charges or pays the high street banks, it affects the rate that these charge or pay their customers. Those who borrow from them will have to pay more and those who save with them will be paid more on their savings (the first much more quickly than the second).
The Bank of England makes a wider claim. According to its website, this is ‘how changes in Bank Rate affect the economy’:
‘A change in Bank Rate affects how much people spend. And how much people spend overall influences how much things cost. So if we change Bank Rate we can influence prices and inflation. We aim to keep inflation at 2% – this is the target set by the Government (…) Overall, we know that if we lower interest rates, this tends to increase spending and if we raise rates this tends to reduce spending’ (BoE as at 7 November 2022 – bit.ly/2ONYcJ1).
The theory is then that if the Bank Rate goes up, people will spend less; a higher interest rate means that those trapped into a mortgage have to pay more to their bank or building society and so have less to spend on other things, the same goes for credit cards; and, since the interest paid on savings goes up, people are attracted to save more and so have less to spend. The overall result will be less spending on consumer goods and services, which is expected to reduce the rate at which their price goes up.
But does it work? Could it work? By ‘inflation’ they mean a rise in the consumer prices index which is a measure of how the prices of a typical basket of goods and services bought by a typical consumer change. So, the claim is that a change in the rate of interest can change the way the economy works by increasing or decreasing the overall amount people spend on buying consumer goods and services.
This might make some sense if the purpose of capitalist production was simply to meet the paying demand of consumers, but it isn’t. It’s to make and accumulate profits to be re-invested as more capital. What drives the economy is what businesses invest, not what consumers spend. This primarily depends on the rate of profit rather than the rate of interest, and that is not something that the Bank of England can affect. Small businesses, dependent on modest bank loans, may be influenced by a change in the Bank Rate in the same sort of way that consumers are supposed to be, but Big Business is typically not.
Big Business is, if anything, more interested in the prices of producer goods, intermediate goods such as materials, parts and energy, used in the production of other goods, which the Bank of England doesn’t even claim to be trying to affect. In fact, the level of consumption is more affected by the level of business investment than it is by the Bank Rate since when business is booming consumption goes up and when there’s a slump it goes down.
Nor doesn there seem to be much evidence that changes in the Bank Rate do have the intended effect on consumption. In his 22 October blog (bit.ly/3TlsuD8) Michael Roberts quotes a study which concludes: ‘It is difficult, however, to find empirical evidence that households do indeed raise or lower consumption by a significant amount when interest rates change.’ But, even if they did, it is difficult to see how this would affect the general price level. The Bank of England could only do that by inflating the basic money supply.