It’s Time to Learn About Monetary Policy Again
Faced with rising prices, the Bank of England decided on Thursday 3 February to raise interest rates from 0.25 to 0.5 per cent. This decision came on the same day as the announcement by the energy regulator Ofgem that the energy price cap would be lifted in April. That means higher energy bills of £693 for average households. And with National Income Contributions (NICs) due to go up by 1.25 basis points in April, millions of people will be worse off by about £1,000 – even after the Chancellor of the Exchequer pledged to cut council tax bills by £150 for 80 per cent of households and energy bills by £200.
So, how are inflation and interest rates understood by the public? Our Deputy Director Prof Adrian Pabst spoke with Johnny Runge, Principal Social Researcher, about his research on the public understanding of economics.
Does the UK public understand monetary policy?
Yes and no.
Yes, because the two main components, interest rates and inflation, are seen by most people as the most important aspects of the economy. Interest rates and prices matter to people’s personal lives, affecting their costs of living and their standard of life. People understand the practical implications of rising prices, especially that they are able to buy less when their wages do not keep up with prices. That is the case for many at the moment who will worry about soaring prices in the economy, including rising electricity, gas and fuel costs. People also generally understand the consequences on their personal finances of high and low interest rates, for instance that their mortgage payments will go up with higher interest rates.
No, because people are not able to link interest rates and inflation together. For economists, the two are intrinsically linked, and this is one of the key concepts in monetary policy. But our NIESR research shows that people know remarkably little about the role of inflation, or price rises, in the broader economy, including the purpose of monetary policy and the Bank of England’s remit to set the interest rate according to an inflation target.
People know a lot about government spending and tax policies which economists refer to as “fiscal policy”. But “monetary policy” is much less known and less well understood.
Why is there a lack of awareness of monetary policy?
Monetary policy has largely been successful for many years. It has succeeded in keeping inflation low and stable. When we talk to members of the public, they often clearly remember high inflation and interests rates from the 1970s and 1980s, but it has not been on their radar in the same way since then.
Or at least not until now. Inflation has reached record-high levels recently. People will be more interested in this issue, and it is important that people understand why these decisions are made. It is an opportune moment for economists, economic organisations and journalists to come together and explain how this part of the economy works.
Monetary policy is complex. Is it possible to explain it to the wider public?
This is an important question. I think it is possible. The main concepts are actually quite intuitive for people to understand when it is explained well. In our interviews and focus groups, people without economics education sometimes figure out, or comes very close to figuring out, the connection between interest rates and inflation themselves when they are asked to reflect on it!
The basic concept is, according to economic theory: If the Bank of England is concerned about rising prices, like it is now, they can choose to raise the interest rate. This means the cost of borrowing will rise, which means consumers and businesses will have less money to spend. Having less money to spend means there will be a fall in people’s demand for goods and services, and so, prices will start falling again.
The bigger question is whether members of the public, with their busy lives and understandably more important and more exciting priorities, will engage in our attempts to communicate monetary policy to the public. How do we make economics interesting and popular, in the same way as science has done? There is a lot we economists can learn from science.
What has been done, or can be done, to explain monetary policy to the public?
The Bank of England, spearheaded by their former Chief Economist Andy Haldane, has actually been a frontrunner in improving how they communicate with the wider UK public. The summary of their Monetary Policy Report is now written in a language that does not require a long Economics degree. Their Knowledge Bank is also a great resource that aims to make the economy simple.
Our old NIESR colleague, Jack Meaning, who now works at the Bank of England, is the author of the Bank’s first popular economics book. It will be published in May and called Can’t We Just Print More Money? I can’t wait to read it.
Senior staff in the Bank of England also attend citizens’ forum events, where they listen to what members of the public have to say about anything from jobs, pay and the cost of living, to their experiences in the housing market. I have attended myself, and can highly recommend signing up.
We did a similar project recently, where we brought economists together with members of the public from all backgrounds. In small groups they discussed different aspects of the economy. This was really valued by the public and economists alike, and really demonstrated how economists need to get closer to lived experiences, on a regular basis. We can learn a lot from the public – after all they are the ones who live and breathe the economy every day. Ultimately, these perspectives will make it easier for us to explain the economy better in the future.