Good morning from New Economy Brief.

Next week, the Bank of England’s Monetary Policy Committee (MPC) will decide whether to maintain the base rate at 5.25% (a 15-year high), as they did in September, or to increase it yet again. The committee recently voted to keep rates where they are by a tiny margin (the majority was just 5-4), suggesting that we may not have hit peak interest rates just yet if the ‘hawks’ get their way.

For a taste of the debates taking place inside the committee, take a look at the recent comments of MPC member Swati Dhingra. One of the five members who voted to keep rates at 5.25% in September, she told the BBC that higher rates could hit younger workers and those on lower incomes the hardest. Monetary ‘hawks’ believe that raising interest rates is essential to bring down inflation and help with the cost of living. Whereas monetary policy ‘doves’, like Dhingra, are more concerned with the wider impacts of rate rises, including their distributional effects.

So, are interest rates increasing inequality? Or, conversely, have the historically low interest rates since 2008 contributed to the economic disparities we see today? This week’s New Economy Brief explores the relationship between interest rates and inequality, and how monetary policy may be worsening the cost of living crisis.

High rates, poverty and inequality. 

The full impact on households of the recent period of high interest rates will not be clear for some time. It can take up to two years for the economic effects of interest rate changes to be fully felt. There have been seven rate rises over the past 12 months, and already anti-poverty organisations are warning that this is harming low-income families, with more than a million low-income mortgage holders going without essentials like food, clothes or unable to pay their bills, and renters also getting squeezed by the rising cost of borrowing. In the face of squeezed budgets and higher debt, it is no surprise that lower and middle income households are feeling the effects of rate rises the most acutely. In 2021, European Central Bank board member Isabel Schnabel warned that raising policy rates in response to a “temporary inflation surge”, will “hurt households with low incomes the most.” Worryingly, it seems her prediction may have been correct.

Gender and high interest rates. Using interest rate rises to tackle inflation disadvantages women in particular, according to the Women’s Budget Group (WBG) think tank. After a long period of wage stagnation, average earnings are now growing faster than inflation and this is being used to justify keeping rates high. However, as the WBG argues, this “headline figure masks significant differences within our fragmented labour market.” Pay in parts of the economy dominated by women (such as the public sector, where wages have grown 6.6% over the past year) is rising much slower than in male dominated sectors like finance and business services (where wages have risen by 9.5%). The WBG adds that women have 8.8% less in savings than men, so they are less likely to benefit from higher rates.

Low interest rates, poverty and inequality. 

There is lots of evidence that current high interest rates are exacerbating the cost of living crisis faced by low and middle income households. However, periods of very low interest rates can also harm those on low incomes. In theory, these people should benefit from lower rates through boosted employment and higher disposable incomes. But those at the top see much greater returns, argues the Finance Professor José-Luis Peydró, because low interest rates increase the prices of assets like shares and property, and the harm this does to poorer households outweighs the gains from increased employment opportunities. As Servaas Storm has argued, low interest rates “fuel asset-price bubbles, creating wealth gains for the rich, and over-indebtedness for the bottom 90% of households, which use cheap credit to finance essential expenses on education, medical care and housing.” 

Interest rates and the ethnicity wealth gap. Low interest rates can also entrench other inequalities. According to the Resolution Foundation, the consistently low interest rates of previous years have “played an important role in sustaining ethnicity wealth gaps, via inequalities in the housing market and the ownership of other assets”. White British, mixed white and Asian and Indian families have the highest total net wealth, while Pakistani, Black African and Bangladeshi families have the lowest.

Looking beyond monetary policy for solutions.

Recent experience shows that monetary policy, in the form of interest rises, is too blunt a tool to tackle the type of inflation currently impacting the UK - that is, inflation sparked by external supply shocks rather than increased demand driven by higher wages.

Growing numbers of economists, including those at the Institute for Public Policy Research, say we need to look to fiscal policy for solutions to high inflation, including the use of fiscal price caps. These involve spending public money to hold down the prices of certain household essentials - for example, the current energy price guarantee. This could be done in other sectors like public transport too, delivering immediate benefits for households and also pushing inflation down. The growing risk of external price shocks from climate change also points to the need to strengthen Britain’s social safety net, so as to ensure that everyone has access to a living income.

As we explored in New Economy Brief back in July, countries like Spain have used these tools to curb inflation while protecting lower income households. The growing evidence of the recent inflation surge’s devastating impact on low income households highlights the need for UK policy makers to adopt a more sophisticated approach to tackling the problem rather than relying on crude interest rate rises.

Weekly Updates

Paradigm shift

New economics of the common good. UCL Institute for Innovation and Public Purpose’s (IIPP) Mariana Mazzucato has published a new working paper on a ‘new economics of the common good’. It explores how policymakers can create a collaborative understanding of public value and common goals between government, businesses, workers and civil society, and steer the economy towards achieving those collective goals and meeting today’s grand challenges as opposed to just fixing market failures.

Inequality and climate change

Expensive cars are worse for the climate. A new report from Possible shows that “Although there was a time when low-income motorists tended to drive less efficient vehicles, that’s no longer the case…the richest fifth of English households are now more likely to be driving inefficient vehicles” due to the more polluting nature of SUVs. The authors challenge the notion that fuel duty impoverishes poorer drivers.


Destitution in the UK. One million UK children experienced destitution last year, up 88% since 2019, finds the Joseph Rowntree Foundation (JRF). The number of people experiencing destitution in the UK has doubled in the last five years to around 3.8 million people.


“Tax evasion is a policy choice”. The EU Tax Observatory’s annual report on global tax evasion has found that tax evasion (including “grey-zone evasion at the border of legality”) is growing domestically, where global billionaires have effective tax rates equivalent to between 0% and 0.5% of their wealth due to the widespread use of shell companies to avoid income taxes. They also find that the global minimum tax of 15% on multinational companies has been “dramatically weakened”, as a growing number of loopholes has reduced its expected revenues by a factor of two (or three relative to a minimum tax rate of 20%)

Solutions. The report recommends instituting a global minimum tax on billionaires on 2% of their wealth, raising up to $250bn a year from less than 3000 individuals, and closing loopholes in the global minimum tax on multinationals in order to raise another $250bn a year. For context, developing countries need an estimated additional $500bn a year to address the challenges of climate change.

Fiscal policy and energy

Calls for major increase in public infrastructure investment. The National Infrastructure Commission (NIC) has published an assessment of the infrastructure the UK needs to achieve net zero, calculating that government will need a “sharp increase in public sector investment in infrastructure to around £30bn per year” until 2040. The report argues this kind of investment is needed for the UK to  rebalance its economic geography, meet its climate obligations, improve resilience and enhance the natural environment.

Energy efficiency and household savings. Sir John Armitt, the NIC’s chair, called on the Prime Minister to commit to a total ban on gas boiler sales by 2035 after a cold snap led to a surge in the UK’s demand for gas last week. The report finds that households could save £1000 a year on energy bills by switching to cheaper low-carbon electricity and calls for up to £6bn in household subsidies to encourage takeup of heat pumps and other energy efficiency upgrades.