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Richard Murphy: True independence means leaving the Bank of England behind

UK inflation, and so Scottish inflation, was suggested this week to have reached 2.5 per cent per annum during June this year. If some economists were to be believed this suggests that the Bank of England should now be planning measures to tackle this inflation because of the risks it supposedly creates for our economy. I am not one of them.

The consumer prices index that is used to measure inflation is a fairly crude measure. What inflation is, of course, is a general increase in prices in the economy which results in a fall in the value of money. No-one much appreciates the value of their money falling, but before anyone panics about what is happening it’s fairly important to put the current increase in inflation in context.

To do that think back a year, because that’s pretty much what the consumer prices index demands that we do. In June 2020 all the governments in the UK were doing their best to keep us locked down, and the economy shut. We all understand the reasons for that, of course, but it must be remembered how unusual that was. Nothing like that had happened before in peacetime anywhere in the UK, or anywhere else, come to that.

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That a year on, as our governments are encouraging us to think that life is returning to normal again (a third wave of Covid apart), it is hardly surprising that the resulting significant increase in economic activity between this June and last is going to be reflected in some price increases.

Now think forward a year. Is it likely that the contrast between this year and next is going to be as big as that between this year and last? My answer is that it might be, but only if in a year’s time we are locking down yet again, and who knows what might happen?

Assuming we can avoid that fate, then actually at best next year might look much the same as now, unless the failure to agree terms with the EU on Northern Ireland makes trade very much worse, which would also be on a one-off event, very unlikely to repeat. In other words, the only real inflation-related risks the economy looks likely to face right now are from Covid and political choices.

Now compare those risks to the only two tools that the Bank of England has to tackle inflation. They are increases in interest rates, and the reversal of quantitative easing, which is the process that’s been used to inject more than £300 billion of new government-created money into the economy to keep it afloat in the last year.

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There is no way that either of these tools is able to tackle inflation caused by Covid re-opening or political risk. That type of inflation is tackled by masks, lockdowns and ministers finally accepting the terms of the Northern Ireland Protocol that they signed in December 2019. What that means is that the Bank of England should sit on its hands right now and leave whatever inflation we get to simply work through the system.

That’s not to say we should ignore that inflation. The Scottish Government needs to think about how it can help those most hit by it – as many people on low incomes will be. I hope that they do.

As important in the longer term, all those with an interest in Scottish economics need to realise how vulnerable Scotland would be to inappropriate decisions on interest rates and quantitative easing if Scotland still used sterling after independence when the inflation the Bank of England might then be tackling might have nothing to do with Scotland.

It really is time that this was appreciated by the whole independence movement. Wanting independence from Westminster is core to the independence argument, but without independence from the Bank of England, it will not happen.

Scotland simply cannot be independent without its own currency, its own central bank, its own inflation targets and its own economic decision-makers tasked with delivering for Scotland.



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