The news media has highlighted how the Bank of England's policy move today was the first cut in UK interest rates since 2009. But this completely misses the important points. By itself, the 25bp drop in the official Bank Rate from 0.5% to 0.25% is largely irrelevant, either as a policy move or as having any real economic impact. Instead, the significant policy decisions are elsewhere.
First, is the Bank of England's move away from its official policy target of stabilising CPI inflation at close to 2%, usually taken as meaning over the next two years. Despite the drop in sterling's exchange rate, and the expectation that this will boost UK inflation, the Bank has decided to look further ahead and cut rates today in the expectation that weaker UK economic demand, employment and output will reduce inflation again by the end of the next three years!
This is another sign of the flexibility of policy in this chronic crisis. Of course, it would have been madness to raise interest rates in the wake of the Brexit vote and the likely impact on the UK economy. However, this policy decision shows how far the rejection of previous policy norms has gone. What it really boils down to is the view that wage demands will remain limited, despite a fall in living standards, so the problematic inflation for capitalists, that of wages, will not actually be a problem. The new Bank of England policy is now closer to that of the US Federal Reserve, which has a more mixed inflation/growth/employment mandate when setting US interest rates.
Second, is the extension of Quantitative Easing (buying up financial securities from banks and other private sector holders, to put cash into the system). Until now, the Bank of England had bought £375bn of UK government bonds, but had kept that figure unchanged in recent years. In the early years of the 2007-08 crisis aftermath, it had had only a small, temporary holding of private sector bonds. That will change with the new policy. Further government bond purchases will occur, an announced £60bn that will take the total to £435bn. All this will do is reduce government bond yields further, as happened today, and further undermine the viability of pension schemes, both public and private, increasing their funding deficits. However, the new angle is for the Bank of England to purchase up to £10bn of corporate bonds.
The latter move is extraordinary, especially in the way the Bank of England poses it as looking to "purchase a portfolio of sterling non-financial investment-grade bonds representative of issuance by firms making a material contribution to the UK economy, in order to impart broad economic stimulus". Leave aside the point that the size of the corporate bond market targeted is only around £150bn, and that they hope that BoE purchases will increase the prices and lower the rates on eligible bonds, also reducing these companies' demand for bank loans that could then be taken up by others, especially smaller companies. The key point is that the Bank of England has now entered the process of deciding to buy bonds only from firms that make a 'material contribution to the UK economy'!
I cannot emphasise enough how far this policy contradicts all the logic that we have heard for decades from policy makers, central banks and governments, of how it is necessary to compete in 'free and fair' global markets. Here we have a central bank from a country at the centre of the world financial system explaining that a part of its new policy is to discriminate in favour of companies that are nationally valuable.
If anyone doubted that the pressures of the chronic global crisis are forcing the major powers to reconsider their positions, and that they are abandoning policies of cooperation - admittedly, cooperation that has been mixed with intense rivalry - then they should consider this latest Bank of England move. The significance is not indicated by the relatively small scale size of the £10bn funds, but in the outlook it offers for future imperial policy.Tony Norfield, 4 August 2016