How the Bank of England deliberately creates unemployment in the UK

SUMMARY

Richard Murphy, a political economist, critiques the Bank of England’s use of monetary policy, arguing that its interest rate decisions intentionally increase unemployment and redistribute wealth upwards. He contends that these policies fail to address the true causes of inflation and calls for monetary policy to be brought under democratic control to better serve the public interest.

MAIN POINTS

• The Bank of England, since 1997, has controlled monetary policy, influencing borrowing, saving, investment, and unemployment in the UK. [1:01]
• Interest rate decisions by the Bank of England create winners and losers, redistributing wealth from borrowers to banks and wealthy savers. [4:00]
• High interest rates are used deliberately to reduce demand and increase unemployment, despite the Bank of England rarely admitting this outcome. [6:01]
• Recent UK inflation has been driven by external shocks, not excess demand, making interest rate hikes ineffective and sometimes inflationary. [9:01]
• Monetary policy includes a substantial subsidy to commercial banks, with £20 billion a year paid in interest on central bank reserves. [11:01]
• Murphy argues that monetary and fiscal policy must be coordinated under Treasury control to ensure economic policy serves the public interest. [15:00]

DETAILED ANALYSIS

Monetary policy, as currently implemented in the UK, is a central tool for managing the economy, with the Bank of England holding primary responsibility since 1997. This shift, initiated by Gordon Brown, separated monetary policy from direct government (Treasury) control, granting the Bank significant influence over money supply, credit, and interest rates. These levers affect not only macroeconomic variables such as inflation and employment but also have direct consequences for households and businesses across the country.

Interest rate adjustments are not neutral acts; each decision creates distinct groups of winners and losers. Higher interest rates benefit banks, wealthy savers, and owners of financial assets, while imposing greater costs on borrowers, tenants, and businesses. This redistribution of income and opportunity is a political choice, made by unelected bankers rather than elected officials.

The result is a systematic bias favoring those with existing wealth at the expense of those in need, deepening societal inequality.

A central claim is that the Bank of England uses high interest rates as a deliberate mechanism to reduce demand and, consequently, to increase unemployment. Economic orthodoxy suggests that reducing demand curbs inflation, but this comes at the cost of job losses. The UK currently exhibits both the highest interest rates and the highest unemployment rates among G7 nations, with 5% overall unemployment and 10% youth unemployment.

These outcomes are not accidental but are the intended effects of monetary policy, even if rarely acknowledged publicly.

The effectiveness of interest rates as a tool for controlling inflation is questioned. Their impact is delayed, often taking up to two years to influence the economy, and is further blunted by the prevalence of fixed-rate mortgages. Historical data show that inflation spikes have typically resolved without central bank intervention, and recent UK inflation was driven by external shocks—such as the COVID-19 pandemic, the war in Ukraine, and disruptions in global supply chains—rather than by excess domestic demand.

In these cases, raising interest rates cannot address the root causes, as they do not increase the supply of goods like oil, wheat, or manufactured products.

Moreover, high interest rates can themselves become a source of inflation. As borrowing costs rise, businesses pass these costs on to consumers through higher prices, and landlords increase rents, further fueling inflation. This undermines the rationale for using interest rates as a primary anti-inflationary tool.

A less visible but significant aspect of current monetary policy is the large subsidy provided to commercial banks. Since the 2008 financial crisis and the advent of quantitative easing, commercial banks have been required to hold large balances in central bank reserve accounts. The Bank of England pays interest on these reserves, amounting to around £20 billion annually—a sum that could otherwise be allocated to public services but instead boosts bank profits and executive bonuses.

Finally, the separation of fiscal and monetary policy creates policy conflicts. While the government may prioritize job creation, the Bank of England’s high interest rates undermine this goal by increasing unemployment. Murphy argues for a reintegration of monetary policy under Treasury control, allowing for coordinated, democratically accountable economic management.

Only through such integration can policy be tailored to address the real causes of inflation and promote public welfare, rather than serving the interests of financial elites.

LINKS

• Link to today's poll on YouTube.
• Richard Murphy's blog and transcript source.
• ChatGPT prompt and instructions for writing to your MP about issues in the video.
• Donation page to support Richard Murphy's work.
• Richard Murphy's Bluesky social profile.
• Richard Murphy's Funding the Future blog.
• Introduction video to Richard Murphy's channel.
• The Wealth Series playlist.
• Ecenomics playlist.
• Britain playlist.
• Tax playlist.
• MMT playlist.
• Money playlist.
• Climate Change playlist.
• USA playlist.
• Labour playlist.
• The Trump Administration playlist.

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