The interest rate went up, and it's not good news for inequality. Here's why.

The Bank of England raised the main interest rate to 4% on 2 February. What’s the effect of this decision on inequality? Fred Malherbe, Professor of Economics and Finance at University College London and Stone Centre Affiliate, explains one of these effects and what the Central Bank could do about it in his recent column in The Conversation.

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Banks receive an interest on their deposits at the central bank which corresponds to the main interest rate. However, banks pay their depositors an interest rate on deposits which is lower than the main interest rate, thus creating a ‘margin’.

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Fred observes that such margins (which have dramatically increased since the Summer) most likely reflect market power in the deposit market. This has important consequences for inequality:

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• it generates money for the banks’ shareholders, at the expense of the depositors, especially the less sophisticated ones, who don’t know they should shop around, or don’t know how to do it, in order to find better deals for their deposits,
• it weakens the effects of monetary policy, making it more difficult to lower inflation, and inflation tends to hurt more the less well off.

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Read Fred’s Interest rates: why your mortgage payments are going up but your savings aren’t – and how better monetary policy could help. His column is a great complement to CORE Econ’s:

• The Economy Unit 10, on banks, money, and the credit market
• Too big to fail, an Insight on the global financial crisis and how regulatory reforms since then aim to address the problems that arise when banks become too big to be allowed to fail.

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Fred Malherbe is Professor of Economics and Finance at University College London and Stone Centre Affiliate. He authored Beyond Pangloss: financial sector origins of inefficient economic booms, with Michael McMahon, which features as a Stone Centre’s research summary

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