Policymakers are wrong to think rising joblessness and a recession are a price worth paying
Sharply raising central bank interest rates might prove catastrophic, rather than just inappropriate, as a solution to the current inflationary environment. That was the message lurking in the speech of one of the Bank of England’s monetary policymakers, Silvana Tenreyro, last week. It’s hard to disagree. While inflation is hurting the poor disproportionately because of their low incomes, rate hikes are a “cure” that is worse than the disease.
The Bank regards growing unemployment as a necessary trade-off to prevent the acceleration of inflation. Its central projection for rising interest rates suggests almost 2.5 million people would be jobless in 2025 – with the worst-case scenarios seeing 3 million out of work. This would lead to widespread misery. Nobody wants to be jobless. Karl Marx’s reserve army of the unemployed is full of conscripts, not volunteers. Many are already deserting its ranks, preferring to leave the labour force entirely rather than be jobless.