140. How Do The Bank of England Really Make Their Decisions?

0:11Hello and welcome to The Rest Is Money with me Steph McGovern. I'm with me Robert Peston. How are you Steph? You're looking in the pink. Do you know what? The arm is starting to heal, thank God. So I am slightly more mobile than I was and also I'm just going to have a slight moment of boasting. I'm buzzing off the fact that I did Who Wants to Be a Millionaire on Sunday and I managed to win£125 ,000 for my charity, which is a charity in Middlesbrough all about supporting young girls in particular to be more aspirational. There was this really rubbish report that came out saying Middlesbrough was the worst place to grow up as a girl.

0:44So ever since then, you know, I've been on this mission to help this charity try and lift the aspiration of girls in particular. Anyway, 125 grand. Can you believe it? I know how nerve wracking these things are. I mean, because, you know, I managed to raise almost as much with a group of people for charity on this thing called The Chase. Oh, yes. Which was enormous fun. But, you know, when you're up to whatever it was, the 80 or 100 grand moment, and you realise that you're in a position where you could lose, you know, money for these really important causes, it's quite scary, isn't it? oh i have never felt so nervous as doing that because it's it's the money but it's also the humiliation isn't it of just looking like thick i was just really worried about that you know going on with nowt and my ego bruised and everything else are you like me that when the spotlight is on you you suddenly doubt yourself you suddenly think i you know you know you know the answer but then in the heat of the moment, you have this weird self-doubt.

1:52Yeah, because one of the questions was about the chancellors of the Exchequer and it was which one of them has had a previous cabinet position before they became chancellor. And I knew straight away it was Jeremy Hunt, but I was literally going through going, Rachel Reeves, did she do anything? You know, I was just being so ridiculous. But yeah, fortunately, your brain pulls your finger in the end. The good thing about who wants to be a millionaire as well is you've got time to think of the answer. You're not on a clock. Whereas the chase, that would freak me out more because you really are on a clock then, aren't you?

2:25The time pressure is real. Now, let's crack on. So there's quite a lot to talk about, but let's kick off with the inflation figures, which we've just seen. Do you want to talk us through the headlines? So inflation for January, more than expected. It's at 3%, which obviously we talk about this 2 % target that the Bank of England have, don't we? So, you know, well above that. And it's more than the Bank of England were expecting. We've talked about how much inflation is still going to be a problem in the year ahead. And they're saying this was particularly driven by the higher cost for private schools because of obviously the government imposing VAT on private school fees.

3:06That's one of them. It's higher cost for food as well, non-alcoholic drinks. But what's your thoughts on what's driving this, Robert? So when I saw the headline, I thought, oh, crikey, Bank of England is possibly going to slow down the rate at which it cuts interest rates. But actually, I'm less gloomy now because actually, if you look at the detail, I think it is arguable that what we're looking at is one off factors and that the underlying trend is still, I mean, it's not brilliant, but it's no worse than we thought it was. And I felt that, for example, one thing just to pick up is, yes, it is the case that 3%, the headline rate, is a bit above both what independent forecasters were expecting and indeed what the Bank of England was expecting, which was 2.8%.

3:58But as we've talked about before, the Bank of England is more interested in core inflation, underlying inflation, not sort of the sort of one off exceptional factors. So the school fees thing, you would expect to be a one off because the government has put VAT on fee paying schools. Another big upward movement was in airfares. Yeah, they normally drop in January, don't they? But there was also something about the timing relative to December, which I can't really get my head around. But apparently, again, this is a sort of one off factor. But I was just looking at services inflation. Right. And the Bank of England is particularly concerned about services inflation.

4:48services 70 to 80 percent of the british economy when services inflation goes up this is basically decisions taken by managers that's also related to what they feel they have to pay people and because it's only indirectly related to the kind of the kind of shocks that we have that are beyond anybody's control you know if you get a a terrible grain harvest that pushes up food prices. If you get Putin invading Ukraine, that pushes up energy prices. These are inflationary factors that are beyond anyone's control. But when you see managers in the service industry just putting up prices, that looks more susceptible to the kind of pressure that the Bank of England can exert via interest rates.

5:40And therefore, they take something like services inflation very seriously in terms of whether or not they think underlying inflation is getting better or worse. Now, services inflation rose sharply from 4.4 % to 5%. But this is the sort of weirdly good news. The Bank of England had been expecting services inflation to rise to 5.2%. So if you believe, as I do, the members of the Monetary Policy Committee are focused more on the rate of services inflation than on the headline rate of CPI inflation, then these figures were relatively good news because services inflation came in under what they were expecting.

6:26Now, I've got to say that none of this means that the inflation in the system has gone away. It doesn't mean that we can expect really rapid cuts in interest rates, But, you know, before today's announcement, you know, the markets were thinking that interest rates would be cut maybe another half of a percentage point by the end of the year. I think it is still the case that, you know, interest rates are likely to be cut another half a percentage point before the end of the year. Many of us would like interest rates lower than that. the economy is showing very little growth. But at least these figures don't make the interest rate outlook gloomier, worse than it already was.

7:17I mean, that's the thing with these figures. You hear a headline, you hear it's not what necessarily all the economists were expecting. But then when you dig deeper, things are often not as bad as you might think they are from the headline. Obviously, there's still a lot of pressure ahead of us, isn't there? In particular, like what Trump's going to do. We've spent loads of time talking about that. But I mean, I was freaked out to see him talking to Putin, to be honest. You know, this kind of Saudi Arabia meeting they had really, it's just really concerning where things are going next. I mean, I can see you shaking your head, Robert, because it is just on so many levels frightening.

7:53I know we focus on the economic side of things when we talk about stuff, but sometimes you can't, you know, forget the human aspect to all of this. And I mean, how have you been feeling about it or watching it? Well, it's horrifying looking at what appears to be the precursor to selling out, you know, Ukraine. Just a nutshell very quickly of the both combination of geopolitical and humanitarian significance. I mean, Ukraine has been on the front line of defending Europe. We should be under no illusion about that. Putin is a threat to the whole of Europe. And it's been cheap at the price. We actually talked to Bill Browder on this podcast about it's been cheap at the price to have Ukraine, in a sense, fighting a war for all of Europe with no British and French troops and other European troops putting their lives at risk.

8:48And just to remind everyone who Bill Browder is, he's obviously the guy who brought in the financial sanction, kind of spearheaded financial sanctions for countries, which go against human rights. And that's really important what he's done there. But as he said, there's still so much more that's happening that needs sorting out. And he's pushing, look, he's pushing incredibly hard at the moment. The idea that he actually talked about on this program, which is the$200 billion of Russian, largely central bank assets that are frozen in Europe. He thinks all of that should just be handed to Ukraine so Ukraine can buy enough weapons to put itself in a much stronger position vis-a-vis Russia.

9:29And he's been talking frenetically, including at the Munich Security Conference, to foreign ministers to try and persuade them finally to adopt that plan of seizing those assets, seizing that money and giving it to Kiev, giving it to President Zelensky. But the bit of it that is absolutely in the heart of our interest is what Marco Rubio, who's representing at this stage Trump in these talks with Russia and talks with the Russian foreign minister, Sergei Lavrov, said during his conference yesterday after that first round of negotiations, which is, you know, Trump wants to rebuild commercial relations with Russia.

10:15One of the things that I am deeply concerned about with deal-obsessed Donald Trump is that so much of what is driving him here is not the ego boost that he obviously wants from a deal that ends the fighting. Those close to him say he's actually desperate to get a Nobel Peace Prize, whether if he ends the war on the basis of a sellout of Ukraine, I'd be slightly surprised if he wins the Nobel Peace Prize. But separate from that, he's always obsessed with the money. And it's quite clear he and Russia have mutual interests in terms of controlling the flow of oil and gas in the world. They are both massive hydrocarbon economies.

11:04We've got climate sceptic Trump turning on the taps again. Putin would dearly love to turn the taps on again. And therefore, there is plainly an oil based negotiation that is going on or is likely to go on with Trump. And then there, of course, is all of Trump's ambitions when it comes to, some would say, the most important minerals in the world, these rare earth minerals that underpin, you know, every bit of our digital economy. China currently controls, you know, vast reserves of these rare earth minerals that are so central to the modern digital economy. Ukraine has vast reserves and Donald Trump has been talking about how as a condition of continuing to support Ukraine, he wants America to have, I think, 50 percent of those mineral rights from Ukraine.

12:07It all looks very commercial, very, very money driven at a time when not only are we talking about, you know, the security of the whole West being at risk if we allow Putin to have a victory here, but also just, you know, the heartbreak of what do we say to, you know, So Ukrainian parents whose children have died in this war, for what? For what? So that Putin's expansion can go on. It's the whole thing is just beyond words appalling. Yeah, it is. It is. So should we go for a quick break? Yeah, really important points you've made there, Robert. But let's have a quick break before we move on.

13:01Hello and welcome back to The Rest is Money with me, Steph McGovern. And with me, Robert Peston. We talk a lot, don't we, Robert, on this programme about the importance of small businesses. I'm obviously always banging on about it because of the couple that I have invested in and are part of. But they're a real backbone to the economy, aren't they? I mean, look, historically, we have been an economy that was dominated by big companies, multinational companies. is actually, unfortunately for the UK, we have fewer of those world leaders now and we therefore are more reliant on a small business sector.

13:39And as a nation, we just have to make sure that our small and medium-sized businesses have the ability to thrive and grow. So because of this, we're going to have this kind of section of the programme, about the kind of SME barometer, just to look at what's going on in the small business sector and have a kind of positive focus on it as well. It's going to be brought to you by Monzo Business. And today we're going to talk about the tax squeeze because we have talked loads about the tax burden on businesses at the moment. But I guess what would be good to do in this is look at what businesses can do, not what they can't do.

14:19And if you're a business, obviously, when any kind of cost goes up, that is a pressure. And the fact that the Chancellor, in order to create the resources she needs to invest in public services, put up national insurance, reduce the subsidies for rates, you know, that's very, very painful for millions of British businesses. But one of the things that's very striking is that many of the world's great businesses have been born in periods of widespread adversity. I've sort of, you know, just looked globally. Businesses that we now think of as being absolutely world leaders in their fields like Uber, you know, born in the midst of the Great Recession after the crash of 2008, 2009.

15:09Yeah, and as you said, there's loads of examples of those businesses. You mentioned Uber, there's Innocent Drinks. Do you remember Innocent actually was based, the headquarters was around the corner from the BBC from television center in Shepherds Bush and so we were forever getting in the guy to do interviews with us and always brought in innocent smoothies yeah back in the day but that was started in the late 90s just before the dot-com crash you know it was high corporate tax rates and they kind of focused on brand differentiation and sustainability and they made it into a multi-million pound success I should also say my slime business, Goo Topia was started.

15:50We kind of expanded just as we were coming out of COVID and we're now seven shops in and got two more open and soon. So there are, I think you're right, it is the time to shine when things are tough. And the other thing I wanted to talk about as well is we always think as businesses and as people paying tax that it's a very negative thing, but there's also lots of tax incentives out there as well. So for example, we've talked, haven't we about research and development tax credits you know it's a tool obviously businesses can use to encourage innovation and there's some misconceptions around it I think when it comes to R &D because lots of people think oh it's big businesses that use that it's high-tech businesses but it can be used by small businesses too for things like construction or beauty so for example Lush you'll know Lush the shop that you can smell three miles before you actually approach one They used them when they were starting out to look at sustainable packaging development.

16:45Even Cambridge, the Cambridge Satchel Company, who've used them for products innovations. There's lots of different businesses out there that have used research and development, these R &D tax credits. And so that might be something as a business owner you should consider if you haven't to. You know, as I say, none of us are minimising how hard it is when costs go up. So long as you've got a sense of drive, a sense of commitment and of products and services that you believe in, you shouldn't worry excessively about the fact that your overheads have gone up. What it's all about is making a plan to grow your revenue line.

17:22The other thing I just want to quickly touch on as well, because it's something I'm obsessed about as an investor, is what a company can do to raise money. And it's these tax incentive schemes for investors called, you've got two of them in the ones that I use, which is the Enterprise Investment Scheme. You might have heard people talk about EIS or the Seed Enterprise Investment Scheme, the SEIS. And which one your business is depends on various things around size and how long you've been going for and stuff like that. But they offer investors tax breaks. So if I, as an investor, want to put money into a company to get a share of it, and they are supported by either the SEIS or the EIS scheme, I can then put that against my income tax.

18:10So it automatically means I'm getting more of a share than I've paid for in the business really, because you're using it to reduce your tax burden. So it's worth, if you're either a business who wants to try and raise a bit of money, look at it. Or if you're somebody who wants to put money into a business, have a look at it as well to reduce your tax burden. So there's things like that as well. I think we probably don't talk enough about as a society. I mean, this is something we're going to come back too because we talk a lot about small businesses on this program and thank you to our business banking partners Monzo Business for supporting this part of the show yeah and you can join me and over 500 ,000 other businesses already banking with Monzo Business and sign up for an account today.

18:51Only sole traders or limited company directors in the UK can apply and T's and C's apply. Right I think it's probably time we had a look at a couple of questions we've been sent in by our listeners. And there's one which I know you will be keen to answer, Robert, given some information and research that's just come out recently. And this is a question from Stephen McIntosh. And he says, Robert made the bold claim that there is absolutely, and he's written that in capital letters, there is absolutely no doubt that for the vast swathes of British employment, when you equip someone with an AI co-pilot, their output increases massively and in a well-functioning economy, that will translate into much higher wages.

19:32This is Stephen writing this, who then immediately defended it quite indignantly, and if I may say, as just a fact. He says, sorry, I'm a doubter here. Is there any serious evidence that an AI co-pilot increases anyone's output, let alone vast swaths of employees? Citation, please. So, Robert, do you want to defend yourself? I don't want to defend myself, but I do want to just talk about this. I mean, as you know, I'm absolutely obsessed with Yeah, Industrial Revolution. And, you know, in terms of Stephen's very sensible question, there's now really enormous amounts of research from, you know, whether it's consultancies like McKinsey, whether it's impressive academics like Brynolfsson.

20:15And there are just now so much academic research showing that AI deployed in the right way increases individual productivity. And listen, I'm talking about my own life, right? And I've used generative AI the whole time. My ability now to research and to process data, manipulate data, I mean, it's gone up by a massive factor. The time that it takes to do things that used to take me hours, in some cases, has been reduced to minutes. And I'm definitely not an anomaly. So productivity is boosted. The bit of what he quoted that's really important is I say or said that that would translate into higher wages in a properly or well-functioning economy.

21:08The bit that always causes me concern is there's plenty of evidence from history that workers' productivity can go up and all that additional output, all that additional profit goes to the owners rather than being reflected in individuals' wages. And that is the thing that I want governments to focus on. Because that's not well functioning. No, because that is an economy that's operating in a very unfair way. And so where I think the political debate is really lacking at the moment is, you know, we've got a government that massively believes in the potential of artificial intelligence. what it hasn't shown is any kind of a plan or even understanding that as this incredibly powerful technology is rolled out we've got to make sure that employers reward their employees on the basis of the increased productivity and we cannot take that for granted now one of the things that is relevant to all of this is some really sort of gripping new research by Anthropic.

22:22Anthropic is one of a handful of the world's leaders in providing generative AI. Its main, I suppose, product is the way we call it, or its main AI brain is Claude. This is a hugely successful large language model generative AI service. And they have started creating something called the Anthropic Economic Index. And what they've done, which I think is really helpful, is they have been analyzing how their customers use their service to answer some very, very important questions. So questions like which sectors of the economy are adopting AI fastest? And then this absolutely central question, which I think is so important to what kind of impact AI will be having on all our lives and what that then means for how governments have to respond by changing perhaps the welfare system and the education system.

23:35And that is the breakdown between how much artificial intelligence augments what we do. That is the increase in productivity. Yeah, creates things. Yeah. And how much that it simply replaces us, how much that it simply automates and therefore dispenses with humans. And its initial work, and this may change, I was going to share these statistics with you. It says that AI use leans more towards augmentation, so making us more productive. 57%, it says. And in those cases, it's AI collaborating with and enhancing our capabilities, productivity, increasing. And then 43 % of AI use is automation, replacing us.

24:27Now, that's an enormous number. 43 % essentially robots replacing us. If it's rolled out across the whole economy, that is a massive shock to employment. Yeah, yeah, yeah. They're fascinating these figures, aren't they? Because obviously they look at things like what types of level of people are using them and in what types of jobs too. So I was really fascinated by, you know, it's more prevalently being used for tasks which are associated to what they call mid to high wage occupations. So people like computer programmers or data scientists, and it's lower for the kind of lowest and highest paid roles.

25:09So it's those mid ones, mid to high. So it's the middle jobs rather than the really high jobs or the really low jobs. It's the middle ground. That's where AI is being used the most. And also what's interesting is over a third of occupations see AI use in at least a quarter of their associated tasks. That's fascinating how it's being used and where. I mean, this is only going to get more and more interest in these indexes. And just to be clear, this is early days, right? These are big numbers of AI affecting our working lives. And we're still in the foothills. But my goodness, the climb is very, very, very fast.

25:50And there is other data around that if you want to understand about the potential shock to the employment of humans, there is other data that shows that already in the software industry, you know, for example, coding, where we had been seeing rapid growth, companies have just stopped hiring coders, right? Because now so much coding can just be done by AI. And so those people who don't understand the magnitude of the societal shock that is only just beginning are being naive. We just all need to wake up to this. And there needs to be a proper national debate about how we protect people who lose their jobs.

26:34I was talking to a welder yesterday, a woman called Mel, who's a brilliant story about getting into welding. and it's incredible because she faced loads of sexism to begin with and everyone was saying you can't do welding and all this. And now she's in her 50s and training the next generation of welders. And she also says that welders are massively in demand because of all the infrastructure projects going on around the world and it's a real skills gap there. But she was telling me how they're using AI in welding now and how it means they can train en masse welders using all this kind of AI augmented reality, all the different use of it now.

27:13She said it's incredible that now it's much easier for them to train the next workforce of welders. And don't get me wrong, it won't be long before AI does the welding, but it's interesting. She said they're very much within the company she works for about embracing it now rather than fighting against it, knowing it will probably make the company redundant in a way because they won't need the welders to do the physical welding because AI will be able to do it. but they're doing this thing now where they're training up the welders but also the coding of the machines and everything she says they're embracing that not fearing it and she said i'm dead excited for the next like where we're going to weld in the future and um you know that's just one tiny little anecdote but i think that's the point isn't it as a business you've got to think about how you can use it to your advantage rather than thinking what jobs is it going to take offers yeah look as as an employer you're going to think this is going to massively increase the efficiency and profitability but it gets back to my point okay now you know your friend maybe has because she's obviously incredibly expert she may have a future um supervising the robots that actually do the welding but you know there will be many fewer welders so now we have to think about how do we retrain those people whose occupation will disappear.

28:35One of my recommendations in How Do We Run Britain, the last book I wrote, was that we need to change the welfare system so that if you lose your job as a result of AI, you are offered the opportunity to get training in this kind of skills that are going to continue to be relevant. And there are going to be loads of those and during that period the government should pay you a very decent amount of money a very decent amount of income it should it should be time limited but i think you know we've got to protect people from a massive income drop in this period we have to redesign the welfare state and education we've said it before yeah education needs changing as well it's about lifelong learning it's about that potential to reskill i think there should be like mentors throughout your career to help you see how your skills are transferable and everything else and we don't do any of that.

29:28This massive opportunity in this country to get ahead of the game in AI and diffuse it throughout the economy, it will only happen if we reduce people's fear of it and that means, you know, essentially putting in place a welfare state that supports its adoption and we're nowhere near having the kind of conversations that we need to make sure that we reform the welfare state in that way. Yeah, and I'm sure obviously we'll come back to this loads, especially as these anthropic economic indexes come out. But we should probably wrap things up now. Thank you very much, though, for the questions you send in.

30:01It's restismoneyatgmail.com if you want to send any more. You can find us through our socials too. Send us stuff that way. Don't forget to follow us if you don't already, wherever you listen to the podcast, just to make sure you never miss an episode. We're at episode like 140 odd now, I think, which is quite incredible. That is a lot of us waffling on. But there we go. Right. Bye-bye, everyone. All the best. Goodbye.