Amid the global chaos rolling on day after day, it feels almost inappropriate to get worked up about something as boring as interest rates. Many people tune out economics debates unless they are worrying about their mortgages. But the mundanity of monetary policy can be more effective at holding economies hostage than any blockade in the Strait of Hormuz.
That’s a bold statement. Let’s break it down.
Interest rates are the cost of borrowing money: for a house, business, infrastructure, anything. The higher the rate, the harder it is to afford to borrow. This especially matters for the green economy, which requires far more up-front capital than the fossil fuel economy. Once built, renewables are cheaper and more stable to run, but getting them started requires borrowing, making them acutely sensitive to interest rates. Higher rates mean less green infrastructure and more dependency on fossil fuels.
Central banks raise interest rates to control inflation. Historically, if the central bank put interest rates up there’d be less money available for spending and as a consequence, prices would fall. But nowadays, prices are driven by the cost of global fossil fuels (and the fertilisers, plastics, and products derived from them) so the formula no longer works. So ironically, fossil fuels cause inflation which in turn raises interest rates and makes the means of addressing the problem (e.g. transitioning to green infrastructure) more difficult at just the moment when it’s most needed.
Which leads to an interesting question: why do we only have one interest rate?
Right now, the base rate applied through the banking system is the same whether you’re building a solar farm or drilling for oil. Emmanuel Macron called this “absurd”. It’s like charging the same insurance premiums for a car with good brakes and a car without any brakes at all. The risks, and the futures they create, are completely different.
The idea gaining serious traction among economists is a dual interest rate: lower borrowing costs for projects that transition us away from fossil fuel dependency; standard rates for those that lock us further into fragile, volatile, risk-laden systems. Having a lower interest rate for green energy projects is a cost-neutral way of achieving transition which saves money and delivers genuine energy independence.
Because the sunshine in Hunstanton doesn’t dim when a tanker is blocked in the Strait of Hormuz. The wind blows in Yarmouth with magnificent indifference to the aggressions of Putin. When Russia invaded Ukraine in 2022, energy prices across Europe spiked, not because we’d run out of energy, but because of a designed dependency – on a commodity traded on global markets and vulnerable to every geopolitical tantrum.
Pakistan’s emergence as a peace broker in the current US-Iran conflict has surprised some. It has been more insulated from global disruption partly because it has undergone one of the fastest renewable transitions of any country in recent years. Solar capacity in Pakistan grew tenfold in five years, taking it past 50% renewable power today. But countries still wholly dependent on fossil fuels are getting hammered.
Real energy security only comes from energy we actually own, from sources that can’t be weaponised: sun, wind, waves, tides. This realisation exposes the manipulation behind calls to “drill baby drill” in the North Sea. Oil extracted from the North Sea is sold on global markets at global prices. Simply getting oil from the UK seabed hasn’t made our bills cheaper in the past few years and expansion of that drilling wouldn’t help now. Handing licences to oil companies simply means short-term profit extraction for them, at the expense of our UK citizens’ collective resilience.
Central bankers at the Bank of England, not drawn to their careers for high excitement, don’t mind debating interest rates (they set them on a monthly basis). While there’s a political line drawn for central banks remaining independent, we’ve come to a point where there is no pragmatically economic neutrality to hide behind. We either stick to a system propping up fossil fuels which is driving cycles of cost-of-living crises, or we change the system.
Ultimately, the answer to volatile energy bills isn’t more dependency on the volatile stuff. We need to redesign systems (including the financial system) to enable a future that works rather than one which perpetuates a fossil fuel regime that keeps spilling out of control.
Photo by Ivan Prokhorov on Unsplash
Article originally published in the Eastern Daily Press
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