Why are interest rates so high? Nothing the Bank of England is doing makes sense right now.

SUMMARY

Richard Murphy, political economist and author, argues that the Bank of England's decision to maintain high interest rates during a period of economic stress is historically unprecedented and harmful to most UK households. He presents a century-long analysis showing that negative real interest rates have traditionally supported recovery during crises, while the current policy benefits asset holders at the expense of borrowers and the wider economy.

MAIN POINTS

• A century of UK data shows that negative real interest rates have historically supported recovery during times of economic stress. [1:00]
• The post-war period and the 1970s oil shock both saw governments allow negative real interest rates to ease financial pressures. [4:02]
• The Thatcher era marked a shift to persistently positive real interest rates, benefiting the wealthy and increasing inequality. [6:01]
• After the 2008 financial crisis, negative or near-zero real rates returned, but recent shocks like Brexit and COVID-19 again pushed rates negative until the Bank of England's recent reversal. [8:00]
• Current Bank of England policy imposes positive real interest rates, transferring wealth to savers and worsening conditions for borrowers, renters, and public services. [11:02]
• Murphy warns that maintaining high real interest rates will deepen the coming recession and criticizes both the Bank of England and government leadership for their roles. [15:00]

DETAILED ANALYSIS

Over the past century, the United Kingdom has typically responded to periods of economic stress by allowing negative real interest rates, a policy that reduces the burden on borrowers and supports economic recovery. Richard Murphy presents a detailed historical analysis, referencing data from 1929 to the present, to illustrate this consistent pattern. During the 1930s recession, the government maintained low nominal rates, resulting in negative real rates, and this approach continued throughout the Second World War and the subsequent years of rationing and reconstruction.

The deliberate suppression of yields during wartime, even as inflation soared, meant that savers effectively subsidized national recovery, a policy choice that prioritized economic stability over returns to financial assets.

In the post-war period, the government continued to tightly control interest rates, ensuring that real rates remained negative or low to facilitate rebuilding and growth. This approach shifted in the mid-1950s, when positive real interest rates became more common, coinciding with a period of widespread prosperity, rising wages, and increased business profitability. However, the 1970s brought renewed economic turmoil, with inflation peaking at 24% in 1975 and nominal rates unable to keep pace, resulting again in negative real rates.

The confusion and crisis of this era paved the way for the neoliberal policies of Margaret Thatcher, who deliberately engineered a regime of high positive real interest rates. This benefited holders of financial assets, increased inequality, and imposed significant costs on borrowers and the broader economy, though the discovery of North Sea oil temporarily masked the negative effects.

The pro-finance bias in interest rate policy persisted until the 2008 financial crisis, after which quantitative easing and suppressed yields led to a return of negative or near-zero real rates. These conditions were seen as appropriate for the post-crisis environment, effectively serving as a penalty for the excesses of the preceding decades. However, recent shocks—including Brexit, which weakened the pound and drove inflation, and the COVID-19 pandemic, which disrupted supply chains—again created conditions of economic stress.

Historically, such periods would have warranted continued negative real interest rates to ease the pressure on households, businesses, and government finances.

Contrary to this historical precedent, the Bank of England has recently moved to reestablish positive real interest rates, a decision Murphy attributes to both the Bank and the government's policy choices. This reversal, he argues, is not economically justified given the supply-driven nature of current inflation, which stems from energy prices, supply chain disruptions, and geopolitical shocks rather than excess demand. High real interest rates cannot address these supply-side issues and instead exacerbate the cost-of-living crisis, increase the burden on mortgage holders and renters, and constrain public investment.

The policy effectively redistributes income from borrowers to lenders, favoring those with substantial financial assets and undermining the economic well-being of the majority.

Murphy contends that this approach is ideologically driven, serving the interests of savers and financial institutions while neglecting the needs of most households and businesses. He warns that if the current policy continues, the UK is likely to experience a deeper and more prolonged recession than necessary. The government, particularly Chancellor Rachel Reeves, is criticized for failing to challenge the Bank of England's stance, thereby allowing a historically aberrant and damaging policy to persist.

Murphy calls for immediate and significant interest rate cuts to realign with the lessons of the past century and to mitigate the worsening economic outlook.

LINKS

• YouTube poll on interest rates.
• Transcript and additional resources from Richard Murphy's blog.
• ChatGPT prompt and instructions for writing to your MP about interest rates.
• Donation page to support Richard Murphy's work.
• Richard Murphy's Bluesky 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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