The UK is now facing the highest rate of inflation since the summer of 1992, whilst economic growth is forecast to slump to one percent by the end of the year, down from three percent in 2007. With no end to increases in food and oil prices, a slump in house prices and a growth in unemployment, analysts are questioning the Governor of the Bank of England’s reluctance to cut interest rates.
According to Mervyn King, in a recent speech at Mansion House, “the value of paper money rests on only one thing – trust. Trust in the ability and determination of those setting interest rates to monitor the value of money. Central to that is the independence of the Bank of England”. It is likely that this trust has been severely diminished, as the number of repossessions skyrockets, as heavily indebted consumers default on payments, and as the Bank of England refuses to cut interest rates to stimulate the UK’s stumbling economy.
Of little comfort to UK workers, was the Chancellor’s discouragement of pay rises in the following recent statement, ‘to return now to inflationary pay settlements would undermine rather than raise people’s living standards, with a damaging circle of wage increases eroded by steadily increasing prices’. Whilst urging restraint in pay settlements may help to ward off inflation, there is a feeling that sky-rocketing oil and food prices are something that the UK has no power over, and are necessities rather than affordable luxuries. As such, the result of Mr King’s inactivity will be a serious tightening of consumers’ budgets, with poorer families in particular having to suffer a serious drop in their standard of living. Thanks to the credit crisis, the situation cannot be remedied by personal loans, as mortgage providers and banks become stricter with who they lend money to.
The fall-out from the credit crisis could however, be far worse than low economic growth and a slight drop in living standards. Economists have warned that more than 1,200 people a day will lose their jobs over the next 18 months, and official figures released in June showed that unemployment hit 1.6 million in March, up 14,000 since January. The situation is equally bad for businesses, with the Home Builders Federation warning of widespread redundancies in an industry which employs 300,000 directly, and many thousands more indirectly.
Rather than implement measures to counter these impending redundancies, Mervyn King said the economy was rebalancing and the Bank should not try to prevent that adjustment. Rather than accept such macro-economic explanations for the current turmoil, UK businesses should be questioning how accountable the Bank of England is for the current instability. According to Jonathan Loynes of City analysts Capital Economics, “the message would seem to be that the Bank’s rate setting committee expects to cut rates only once more at the most. It’s inability or reluctance to cut rates further now increases the chance that the downturn in the economy will be both deep and prolonged.”
The period of stagflation culminated with the end of the Labour government. Whilst union strength has diminished considerably since the 1970’s, there are signs that a previously apathetic UK electorate are likely to vote in a new government, partly due to unease over Labour’s economic policy. As Peter Hennessey recently said, “the brute force of the voters with stagflation made Mrs Thatcher possible”. If no further monetary policy action is taken, it is likely that New Labour will go the same way as Old Labour, and face an extended period in the political wilderness.