It is widely expected that the Bank of England (BoE) will increase interest rates on Thursday. This would be the fifteenth consecutive rate rise approved by the bank’s Monetary Policy Committee since December 2021. Last month’s 0.25% increase pushed the rate of interest to 5.25%, its highest in over 15 years.
The bank’s rationale for continual rate rises is to tackle the high level of inflation the UK has been experiencing since the end of 2021. But this supposed remedy does nothing to quell inflation. All the policy has done so far is erode household incomes, pushed up mortgage repayment rates, inflated bank profits and made redundancies and job losses more likely. The effect of each rate increase is felt in society long after they have been announced. Former Chief Economist at the BoE, Andy Haldane, cited this as a reason to pause and rethink further rate hikes.
Join us and PositiveMoney to demand a tax on banks instead of punishing rate rises!
The real drivers of inflation are factors largely outside of the BoE’s control and include global commodity prices of oil and gas, increased cost of imports since Brexit/the pandemic and the effect of low global crop yields on food prices. The BoE’s bank rate decision does not move the dial when it comes to inflation, it is a blunt tool, an ineffective remedy.
There is also evidence to suggest that soaring corporate profits, or ‘greedflation’ is to blame for runaway inflation. Unite the Union research found that the profits of the UK’s largest companies are now 89% higher than before the pandemic and that opportunistic price gouging is the true driver of inflation.
Others at the BoE such as Governor, Andrew Bailey – take a different view. Bailey has preached the importance of pay restraint in the public sector, to ensure that high levels of inflation do not become embedded in the economy. Bailey himself enjoys a ‘remuneration package’ of nearly £600,000 per annum or twenty times the median UK annual salary and was conspicuously silent when research from the High Pay Centre published earlier this month found that CEO pay at FTSE 100 companies had increased by over £500,000 (a 16% pay increase) compared to last year. The message from Bailey and the government is clear, the public has to ‘hold its nerve’ and accept this tough medicine – in the form of high interest rates – in order to beat inflation and kick start the economy.
But there are alternatives to this economic orthodoxy that has failed us. Other countries, who face the same global pressures as the UK have experienced much lower rates of inflation. For example, Spain’s current rate of inflation is much closer to the BoE’s 2% target than the UK’s current rate. This was achieved through direct action. Spain introduced a wealth tax during the pandemic, also known as the ‘solidarity tax’ which taxed individuals with wealth of €10 million and over at 3.5%, and is estimated only to affect 23,000 people or 0.04% of the population. The ‘solidarity tax’ was so popular it has survived beyond the Covid era and has had an impact on curbing demand in the Spanish economy, resulting in lower rates of inflation. Alongside these measures, the Spanish government also capped energy prices by more than the UK government, set rent controls and reduced the cost of public transport.
In order to fight inflation in the UK, we need to look at alternative solutions. This is why we are supporting our friends at Positive Money in their dual campaign calling for the BoE to halt rate rises as well as on the government to impose a windfall tax on the obscene profits made by the big four banks. As Positive Money pointed out, the big four banks have made almost £30 billion in profit in the first half of 2023, which is an 80% increase on the same period last year and a staggering 723% increase on 2020. It is time for the burden of this current crisis to be distributed more evenly – a windfall tax on the banks would be a good place to start.
Rob Donnelly is The Equality Trust’s Policy and Research Officer.
Join us and PositiveMoney to demand a tax on banks instead of punishing rate rises!