As the FT notes this morning:
The Bank of England is moving closer to a rate rise after some members of the interest-rate setting Monetary Policy Committee indicated they stand ready to vote for an earlier-than-expected increase.
I believe the reports. There are, I am sure, members of the MPC who fear the spectre of inflation running rampant across the economy again when it is currently at the far too low rate of 1.8%, when real wages are still well below their peak, when there is still mass unemployment and even more unemployment, and when the first hints of recovery clearly need to be snubbed out immediately. Such depravity of economic thinking does, I am sure, exist on the MPC.
But at the same time I think it only appropriate to say two things. The first is that any Chancellor worth their salt would change their inflation target in the current environment. With the debt mountain we still face a target of between 3% and 4% would be just fine, and maybe even too low. Such a change has to be part of the structural change in practice that the economy needs.
There is also a profound practical need for that change in approach, which is that any interest rate rise in the UK will be catastrophic for amy households. The average current UK mortgage rate at present is, apparently, about 3.4% whilst the average balance is about £96,000. No doubt many of the households have bigger loans balances than that. But even for those on such balances a rate rise of 1% (which is entirely plausible) increases their annual cost £80 a month. When you can't already make ends meet, as many households in the UK cannot, that will tips you over the edge. Finding another £1,000 a year in that situation, and when real wages are still falling,is impossible.
The biggest question that many politicians will have to face in the next year is what they will do for those who will find themselves in this situation and how they will handle the consequences. I suspect few have answers but the Bank of England may make them face the issue, whether they like it or not.
Broken Britain may look to be in deep trouble as 2014 progresses.
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“when real wages are still well below their peak”
Indeed, so why do you call for higher inflation ? That would exacerbate the cost-of-living crisis.
With so much unemployment, as you claim, there is no pressure on companies to raise wages substantially in order to hire new staff, so with your desired 3-4% annual inflation we would need to see nominal wages growing at 5-6% in order to see any impactful real wage growth. That just seems very unlikely under current conditions.
I want wage inflation!!!!!
I want real pay rises
I’m sure you do. I just think real wage growth is easier when CPI is below 2% and companies can raise wages at nominal 3-4%. Which has been the situation of the last few months.
If general inflation goes back to 4%, with companies pressured with rising transport and heating costs, I don’t seem them raising wages 6-7% nominal. Which is why we had the cost of living crisis in 2011-2013.
Many will not agree with you
But that’s economics
I know your primarily a tax blog, but I was just wondering what do you suggest happen regarding housing. As a young person who is saving like crazy to buy a house or flat of some kind, I cannot help but think that the interest rates do need to go up to stop this insane 10% mortgages which helps to drive the prices of houses up.
Having said that, I am also well aware that there is a serial shortage of houses available and that not enough are being built at all. Furthermore, as I understand it a lot of the prime properties are being bought up by overseas investors. Source:
http://www.theguardian.com/business/2014/feb/01/rich-overseas-investors-uk-eu-housing-market
I am just wondering what your thoughts are about this serial housing shortage, and how you would suggest any government should tackle it. This to me is the big question of the day, because people are losing their mobility because they have to pay off this mortgage that will stick with them for decades.
Build, build, build
But for social rent as well as buying
And as for the market: rent controls are needed
And capital gains on housing or a land value tax
I am working on more ideas
Here’s what I said on the Labour Land Campaign stall at the PCS conference this week and at the LRC fringe: how LVT can solve the housing crisis.
We need to build more houses but you first have to acquire the land. Less than 1% own 69% of UK land. Only 10% of UK land is built upon and most of the rest is designated agricultural, for which the owners receive EU subsidies (whether they produce anything or not). So, first you impose a full land value tax payable by landowners on all land except owner-occupied residential (there’s a different strategy for this). The idle rich who own most of this idle land may be able to pay the LVT because agricultural land is not high value (even with the CAP subsidy).
Then you designate a few large idle sites as residential land for new garden cities. The owners would soon want to get rid of the sites because they will not want to pay £multi millions a year in LVT on residential land – they are idle, they don’t do building. But with the tax the selling price of land will tend to zero. So the govt will be able to acquire the land for next to nothing – or if necessary under coompulsory purchase – and get building affordable housing (c £100k building cost). These new homes can either be rented out or offered for sale at c£100k, with the buyer paying LVT.
Regarding housing, I feel the Government should offer a bail out to help people cope with something that has been allowed to get out of control for so long. The rentiers won’t like this and it will take sovereign money creation to do it. House prices need to crash and people protected from the negative equity -will it happen…NO.
I am hearing the ‘I voted Green’ message from a lot of informed people
Low interest rates are needed to encourage real investment. The only reason the Monetary Committee want to raise interest rates is to cool the housing market. That is a job for fiscal policy, not monetary.
Agreed
My god, I completely agree with you, either this is a random alignment or reading your blog is changing my views………..troubling!
I am sure you will recover soon
But haven’t low/no interest rates caused the debilitating financialisation of our economy? And what about the interests of savers? Or those who are relying on endowments to pay off their mortgages and are going to be up shit creek come maturity time? Just asking…
Low interest rates are essential to long term stability and the removal of financialisation
Savers should rely on the return on real investment, not on the return on cash
Endowments were never going to work because of charges – I worked that out by 1987
Thanks for replying…
But don’t low interest rates actually cause financialisation as they facilitate gambling to a huge scale on financial tools that are largely worthless and thereby remove funding from the more productive sectors of the economy?
Then, if you’ve got the time, please explain how low interest rates help savers with real investment, what real investment is, and how many savers actually invest in “it” rather than relying on the return from cash.
And finally, whilst you may have worked out that endowments were never going to work, what about us ignorant saps who believed the hype, are suffering due to the low interest rates and will be up shit creek come maturity time?
Financialisation relies on arbitraging rates, not absolute rates. The way of stopping it is regulation.
Real investment produces real return but carries risk. People must make their own choices on that
I have no solution to endowment mis-selling, but that warnings have been made many times and people cannot be blind to them
I respectfully disagree.
This government, like all other neoliberal governments, views any public/planned intervention in the economy as wasteful and inefficient. They have chosen to attempt to stimulate the economy using monetary levers (i.e. ZIRP) while aggressively reigning in fiscal levers (e.g. sausterity) in order to prevent inflation from running higher. This is ideological, and it has for them the useful side effect of maintaining if not actually increasing asset values like property, shares and gilts while decreasing labour costs. Hence the only part of the economy to grow is inequality.
Irregardless of whether we should target a higher rate of inflation or not in order to overcome an historic debt burden, it can be argued that on its own a Keynesian or MMT style expansion financed by deficit spending or central bank money creation could cause a weakness in the currency and subsequent rise in inflation. Maybe a good thing but maybe not. If confidence in the currency is desired to maintained then fiscal expansion should be accompanied by an increase in interest rates.
Neoliberals have it doubly wrong in 1) fiscal retraction and 2) ZIRP. The alternative of expanding fiscally (e.g. green investment, job guarantees, house building) – while preventing any resulting currency weakness (if necessary or desired) by increasing rates would see a return to full employment and a return to real wage increases (since inflation is under control). Increased confidence, activity in the economy and resulting tax receipts will take care of any concerns regarding the “deficit” as it did in the post war years.
Because rates would have risen we will the currently overvalued asset base decrease in value. Homes will become more affordable to workers and young people. Inequality will finally begin to fall. Yes, there will be losers. The banks, the rich asset owners and indeed many people who made poor decisions in obtaining mortgages that they could not afford in the absence of government subsidy. Also victims of neoliberal “thinking”. The only silver lining for such people is that there would now be more jobs available, wages will be rising, and hopefully a public house building programme.
Austerity and ZIRP are the two planks of neoliberalism. They must both go.
ZIRP?
Zero interest rate policy? Or what?
You got it.
Look on the bright side. The banks/lenders will repossess the houses that cost them nothing, so their balance sheets will look better!!
Low interest rates surely encourage speculation in our current system? As the carry cost is close to zero for those nearest the created money. I would suggest that this and capital flight is pushing the housing ponzi price boom.
Perhaps tax relief on debt interest funding buy to let should be reviewed. The savings could be ploughed into a building program.
I don’t think interest rates change the rate of speculation. Differentials do that
But I agree with your second point
The state of the housing market should not determine interest rate policy. What’s wrong with fiscal policy?
Nothing!