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  February 12, 2018

'Normalizing' Britain's Interest Rates by Raising Them May Slow Economy

The Bank of England announced plans to raise interest rates to combat inflation, but the actual effect will be to slow its economy and raise unemployment in light of a phantom threat, explains economist Mark Weisbrot
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Mark Weisbrot is Co-Director of the Center for Economic and Policy Research in Washington, D.C. He received his Ph.D. in economics from the University of Michigan. He is author of the book Failed: What the "Experts" Got Wrong About the Global Economy (Oxford University Press, 2015), co-author, with Dean Baker, of Social Security: The Phony Crisis (University of Chicago Press, 2000), and has written numerous research papers on economic policy. He writes a column on economic and policy issues that is distributed to over 550 newspapers by the Tribune Content Agency. His opinion pieces have appeared in The Guardian, New York Times, the Washington Post, the Los Angeles Times and most major U.S. newspapers, as well as in Brazil's largest newspaper, Folha de Sao Paulo. He appears regularly on national and local television and radio programs. He is also president of Just Foreign Policy.


SHARMINI PERIES: It's The Real News Network. I'm Sharmini Peries coming to you from Baltimore. Britain is entering its final phase of Brexit talks, but the nature of the final deal still seems rather unclear. Meanwhile, the economic impact of Britain leaving the European Union seems to be mostly negative. A recent European Commission analysis showed that even if the UK does not leave the EU, its economy will grow slower than all the other European economies. Despite this forecast, the Bank of England announced on Thursday that it will be raising interest rates sooner than expected. Here's what the bank's governor, Mark Carney, had to say about the interest rates.

MARK CARNEY: What the committee has said is that we expect that in order to return inflation sustainably to target, recognizing that we expect the economy to move into a situation of excess demand, and inflation still to be above target at a three-year horizon, that in order to bring it back to target over a more conventional horizon, which means moving it in from that three-year horizon, that it will be necessary, likely to be necessary, to raise interest rates to a limited degree, in a gradual process, but somewhat earlier and to a somewhat greater extent than we had thought in November.

SHARMINI PERIES: Joining me now to make sense of Britain's economic situation and its connection to Brexit is Mark Weisbrot. Mark is co-director of the Center for Economic Policy Research and is the author of Failed: What the Experts Got Wrong About the Global Economy. He joins us from Washington. Thanks for joining us, Mark.

MARK WEISBROT: Thanks, Sharmini. Good to be with you.

SHARMINI PERIES: So, Mark, why is the Bank of England saying that they are going to raise interest rates more this year than they originally expected when they projected inflation to fall? Is this similar to the problem with the monetary policy of central banks in other countries, including the US here?

MARK WEISBROT: Yes, absolutely. I think this is a problem. They say they want to normalize interest rates. They've kept interest rates low, 0.5% or even lower for a while, since 2009. That was good, but they do run the risk of slowing the economy even further right now. It's been very, very slow. It was, as you mentioned, one of the slowest growing in Europe, and pushing unemployment back up, even possibly causing a recession.

The same is true of the Federal Reserve. We have the same, if we're going to have a recession here, that's still one of the most likely causes. Virtually all of the post-World War Two recessions in the US, except for the last two, which were caused by the bursting of the stock market and the housing bubble respectively, but all of the recessions were caused, really triggered, by the Federal Reserve raising interest rates. And so, this is the kind of thing that they have to worry about, and so do we here.

Of course, this turmoil that you see in the financial markets, which is often reported in the media as a result of wages rising or a threat of inflation, it's really more than anything, to the extent that it's responding to some data or events, it's really responding to the increased possibility that central banks like the United States, like the European Central Bank, will have a tighter monetary policy and slow the world economy.

SHARMINI PERIES: And Mark, what does this have to do with Brexit?

MARK WEISBROT: Well, For one thing, everybody acknowledgements there's a lot of risks going forward. Brexit's very uncertain. They don't know what the result is going to be, what the outcome of the negotiation is going to be. There's a lot of downside risk that they would lose trade, and that would slow their economy. So, the central bank should be even more careful. I have to say, of course, that the central bank of England so far has done fairly well. A lot of economists will say, "You need fiscal policy. There's only so much that monetary policy can do."

That's partly true, but here again, we run into this ideological problem, and the lack of understanding, and a lot of misleading of the public. I think the debt of the UK government is about 80% of GDP right now. And so, everybody who wants austerity, of course, or further debt reduction points to that and says, "That's really high." But that's a kind of misleading measure because what really matters is not the ratio of the debt to the GDP, but it's how much you're paying on that debt. If you have a credit card debt at 0.1%, you wouldn't be worried about it that much. And so, the debt payments for the UK government are about 1.8% of GDP, which is pretty small by any historical comparison in the UK or even internationally. It's not a lot. So, people have to understand that as well, as well as the monetary policy. I think that's where you have a lot of public misunderstanding, and of course, misunderstanding by a lot of the policy-makers as well.

SHARMINI PERIES: Does this have anything to do with political issues like Jeremy Corbyn and his leadership of the Labor Party, and anticipation of it?

MARK WEISBROT: Absolutely. You know, this is another part of the debate over policy and monetary policy. The whole rationale of raising interest rates, which Mark Carney didn't say in that clip, but it's basically based on the idea that you're trying to prevent inflation from getting out of control or bringing it back to control, as he said. The idea is that if wages are rising, then that leads to inflation. They're deliberately, when they raise interest rates,they’re deliberately causing job creation to slow or unemployment to be higher than it otherwise would be.

Most people don't know that, either. I think there would be a lot more attention paid to this and a lot of more criticism, and maybe even protest, as you're starting to get organizing here in the US, as you know, on Fed policy because they're really throwing people out of work in order to bring down wages on the theory that that is a problem and that will therefore lower inflation.

And there's so many things wrong with this, but one, it's just wrong. In the UK, for example, wages are not even caught up with their level of 2011, and they're not rising very fast at all right now, barely, maybe 0.7% over the last year in terms of real wages.

SHARMINI PERIES: Mark, 0.5% is very different than what we are seeing reported in this recent discussion with the markets falling. People were saying that partly caused by the 2.9% rise in wages, here in the US, anyway. Does that replicate itself in the UK? Wages really haven't increased in real wages since the '70s. Why is this causing such turmoil, this little percentage increase?

MARK WEISBROT: Yeah, that's not even the real wage. So, that's not taking inflation into account, so it isn't really that much. And again, you have the same thing. It's because they think that the Federal Reserve is going to respond to that wage increase. At least that's what's being reported. It's not even clear that the Fed will, but if they did, they will respond to that increase by raising interest even more than they are expected to this year.

So, it's really a very serious problem. Again, this is I think the biggest threat to our economy. Obviously, the stock market can deflate. It's somewhat overvalued and that could influence the economy, but it's very little compared to what the Federal Reserve can do.

SHARMINI PERIES: All right, Mark. I thank you so much for joining us today and looking forward to your report next week.


SHARMINI PERIES: Thank you for joining us here on The Real News Network.


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