The prospect of Britain's first interest rate increase in more than a decade loomed large on Tuesday after inflation hit its highest level since 2012 and Bank of England governor Mark Carney said it had further to rise.
Financial markets are now betting strongly on Threadneedle Street's monetary policy committee reversing the quarter-point cut in borrowing costs made in the aftermath of last year's Brexit vote after the annual increase in the cost of living edged up from 2.9 to 3%.
So, with real wage increases running at a negative rate of 0.9% based on this data and annual wage increases being 2.1% per annum the Bank of England is going to compound the misfortune of most people by increasing interest rates.
I don't think this is by itself the tipping point which will make most people realise just how irrelevant they are to those who make decisions on economic policy in the UK, but it will certainly add to the sense of dis-ease that many will have on that issue.
As acts of economic folly go this one will take some beating. It is, after all, contemptuous of most people in the country.
But a no-deal Brexit will top it by some way, of course.
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I’ve made this comment before on this blog that the Bank of England ( and other central banks ) have become an irrelevance for the last ten years since the Crash so now like some poor soul awaking from a coma they stir and hope to make a noise, even if it makes no sense, because they have been asleep for so long in the hope that someone will notice they exist . Just another zombie reaction in the zombie financial world that engulfs us all , but somehow we have to engage with on a daily basis.
so there is a massive personal debt bubble, where banks have, in the main, continued to feast at normal rates and we are supposed to believe that raising interest rates will benefit us all? Of course the banks will take the hit and not pass these rate increases on.
The majority of people who are seeing negative real term wage increases have been propping themselves up with personal debt, whilst the 1% see income grow exponentially….there will come a breaking point and it will come very soon!!
Hmm I’m not so sure the breaking point will come that soon, the 1% have a huge PR machine in the form of the right wing press that has fed us a daily diet of twaddle for years now and many people despite being poorer now than for many years are convinced that there is no other way. We see time and time again people who vote against their best interests convinced that something will eventually trickle down to them, after all if you have made the same mistake for 30 years or so why change tack now??
Desp
I know…
And I still think that, like sticking plaster, it will fail some time
“the right wing press”
Didn’t fare too well at the last election. If anything their current rate of decline is quite stunning – even to those, like myself, who expected it.
Bet they don’t.
Probably right.
Although, come to think of it, the cost-push inflation that comes with Brexit does provide something of a cover, a false pretext, for a rate rise and the BoE might fear that the currency decline / import inflation may be a one-off experience. So if they are going to do this (for whatever reason) they may want to proceed while the opportunity is still there?
It’s a long way to go to Jackson Hole, Wyoming to not follow the plan when you come home.
We’re going ahead with the plan I suspect. The figures don’t have a bearing. A plan’s a plan.
What are you talking about? Being cryptic eventually does not help
As I outlined after the Jackson Hole meet, I reckoned the three central bankers drew straws. Yellen was to unwind QE, Carney to raise interest rates and Draghi to carry on with yet more QE. Which I think is still running(?) 60 bill- or mill- or sqillion a month.
If that’s what they agreed Carney is not responding to new figures he’s just doing what they agreed.
To see what happens – because they don’t know what to expect. They are flying blind in the fog with no chart.
If it all goes pear-shaped because the market takes a hissy-fit, Yellen will make good on her prediction that she doesn’t expect to see a crash in her lifetime by piling money back in, Draghi will do what it takes and Carney will say it’s time the UK government took some fiscal steps which he’s been saying for more than twelve months.
What I read yesterday somewhere regarding continued of climb of Wall St prices makes the point that although US stopped actual QE years back there’s still QE going on and the money flow is international not confined to the area where it’s issued.
What’s cryptic about that.
I forgot your story
I would not have been alone
Sorry
What I found most shocking in The Guardian on this topic was an article by Patrick Collinson saying “inflation is back – and this time the effects could be much worse” (https://www.theguardian.com/commentisfree/2017/oct/17/inflation-five-year-high-debts) which completely failed to mention the group that are being hit hardest by this – the working age people and families relying on means tested benefits, tax credits and Universal Credit. All of those are being frozen in nominal terms until at least 2020 so increased inflation is making this group worse off in a very direct manner. And the Guardian apparently doesn’t want to know. Some “liberal” newspaper.
I agree
The focus was instead on pensions going up
That’s wilful blindness
No: it’s painting a target on the old, the next soft targets for diversion of public rage.
What I find dismaying about Mr Collinson’s drivel is the alarmist tone of it.
It’s positively tabloid in tone. The Guardian at times is the Daily Mail for the slightly more literate. (Reading age just and so into double figures)
Inflation cannot possibly go berserk again like the period he describes without the entire edifice collapsing. It’s facile to make the sort of comparison that is the gist of his article.
Collinson has never been amongst the Guardian’s better journalists
But this was just poor
I shouldn’t blame Collinson then, Richard.
I should blame the editor.
Whatever happened to the spike ?
There must be a digital equivalent.
My computer has a bin. (I miss it sometimes, but I don’t get paid for my efforts and I don’t pretend to be professional.)
I am not a great fan of current editorial direction…..
PS.
(Tobacco does stir the brain cells.) I wonder if I’m seeing a valid parallel between the functions of an editor and an auditor?
I have just recently read the article in question. It was not only facile but shamelessly unsubstantiated. It was tabloid but not like the Sun or Daily Mail. More like one of these celebrity gossip papers that just fabricate stories on a whim.
Yeah, right now we have inflation in housing costs, groceries and living costs, but not in wages or benefits. People are getting poorer with each year and Brexit will only make that worse. When the businesses start failing because they’re not able to compete with tariffs on top, then we will really see economic misery.
Inflation in premier and international class footballers too.
Rich man’s Subutteo !
UC was well covered in the Guardian that same day https://www.theguardian.com/society/2017/oct/17/we-went-days-without-eating-properly-universal-credit-misery-inverness and it occurs to me as its effects spread nationwide then it might just provide the tipping point spoken of above.
Am I being a simpleton here in thinking that this interest rate rise proposal is aimed at helping to collect more rent from the high levels of debt anyway? It looks like a grab for more rent before the inevitable crash to me.
As for the Guardian – the increasingly market orientation of the paper (aimed at attracting more advertising revenue perhaps) is worrying. I think that when you see this in a progressive journal it is indicative of a fight back by neo-lib/market orthodoxy. ‘They’ must be worried.
You may be right re (1)
Re (2), you are right
As Richard pointed out a few weeks ago on the subject of inflation – some of this current rise is no more that the effect of the drop in the value of Sterling after Brexit.
Depressed economic activity in the ‘high street’ economy has inevitably delayed the effect because retailers are keeping prices as low as possible to keep stuff moving out of the door.
I have to disagree with you and quite strongly!
The problem is far more historic than the potential rise in the interest rates.
The problem actually comes from the 20 year cut in interest rates. These were used to maintain the myth of banishing boom and bust and to fuel consumerism and consumer debt.
It worked, houses that were unaffordable became “affordable”… but only because of low interest rates. The debt itself doubled and tripled. But this was seen as good because house price inflation is seen as wealth creation.
It helped the banks to as the greater the debt the population has, the more money they make.
Then along came the Crash and the banks needed bailing out and the economy needed one more little boost.
The Bank of England used the last few percentage points left to drop interest to near Zero. And then started printing money but gave it a nice professional name, Quantitative Easing. This might have worked if they had given it to the economy directly eg; public works or industry direct investment… But instead they gave it to the very people that caused the problem; the Banks.
And now we are left with no place to go, all the toys are out the pram and all the fiscal levers lay used up and abandoned on the nursery floor.
Now we are pressured by Sterling devaluing, a sluggish economy at best, international finance abandoning the UK (see the ONS £469bn Report), UK bonds being unattractive and Brexit is yet to bite.
So what does the Treasury do? Well they have to support the Pound and make investment attractive. The only tool they have left is to increase interest rates to support the Pound and inward investment.
The challenge is that it makes everything less affordable and if house prices are once again hit then mortgage holders default and the Banks go under. Never mind all the other things bought on credit Cars, TVs, etc which become less affordable.
But if they do nothing the pound will enter free-fall and inflation will destroy the value of everything. It takes 17 years at 4% to halve the value of your property. But i suggest that the devaluation of the pound linked with inflation makes the results even more terrifying.
All the while without onward investment the supply of external capital dries up, this is why the government has talked about a new tranche of money printing (Quantitative Easing).
So the point is that we are between a rock and a hard place.
We have used up all our Fiscal toys and now the only decisions to be made are bad.
There are other things that could be done but the government is wedded to the NeoCon fiscal model that got us here in the first place.
So they continue to follow the Einstein insanity model… continuing to do what you always did and expecting a different result!
No we have not used up all our fiscal tools
Nor have we used up all our monetary tools, by a long way
We have just delivered low interest rates that reduce rentierism in the economy
The poverty of thinking us in thinking low interest rates are an error when they are a pre-condition of a just society
I do not have a high regard for the Don’s conrtibutions generally but I’m not sure that I follow you on this one entirely, Richard. There is a relationship between low interest rates and asset-price inflation. There is also a zero lower bound.
The BoE’s thinkning may be wrongheaded at the moment but I am not sure that having a permanent philosophy of “the lower the better” on interest rates is viable. I hope that is not what you’re saying.
Yes it isxwhat I am saying
I am with Keynes on this
By preference all economies want low rates
“…But this was seen as good because house price inflation is seen as wealth creation….”
Sure is easy to fool a lot of the people a lot of the time isn’t it?
So you raise interest rates, which increases the value of the Pound, and so reduces the level of inflation associated with the weakening in Sterling associated with BREXIT. In which case the rate of real wage increases rises, but interest costs increase.
Or you don’t raise rates, accept inflation associated with the weaker Pound, which means wage rises remained constrained, but interest costs remain low.
I’m sure I have probably missed something, but are you suggesting there is a monetary means of controlling inflation without adjusting interest rates, or is the BofE’s failure to instigate that measure just another part of the Central Bank conspiracy which Andy Crow discusses above ?
Yes of course I am saying there is such a mechanism
It is tax! Like interest rates it can take demand out of the economy
Read The Joy of Tax, I suggest
when is it going to be time Richard? You criticise central banks for stoking asset bubbles by dramatically lowering interest rates and when they start to reverse the policy you argue against that. Following such logic interest rates should never have declined in the 1980s – rates could still be at 20%…
The rile rate did not create the bubble
Pumping QE cash into the economy did that
People’s QE would have absorbed the money productively with low rates
That’s a very different outcome
Please remember there are always more than two levers in the economy an decions are not binary. Thinking they are, as you did, ha the mistake
Whilst distancing myself from the original comment here. It would note that there was a bubble (and crash) before QE.
This issue does have its difficulties.
People’s QE may be a better response. My point is that it is not unreasonable to start on a basis that if a government sets an extreme policy setting then it is likely that will be reversed in the future once the particular need subsides. The concern of people being affected by the rate rise in unwinding the policy was forseeable at the time of QE. I assume your argument is that the change in circumstances makes the concern of greater import – presumably because of stagnant income growth and low productivity. Central bankers have to weigh up this concern against extreme asset valuations however.
Regarding levers, note there are other levers however the scale of impact of QE is so extreme as to reduce the significance of other levers – can you point to any government anywhere which has successfully been able to mitigate the inequality, asset bubble and other side effects of QE?
From a marco point of view it’s a fair argument that inequality is in part resulting from macroeconomic imbalances which will not reverse until the imbalances adjust. Which would suggest limits to what any government policy can do.
“…The concern of people being affected by the rate rise in unwinding the policy was forseeable at the time of QE. I assume your argument is that the change in circumstances makes the concern of greater import — presumably because of stagnant income growth and low productivity. Central bankers have to weigh up this concern against extreme asset valuations however…..”
The problem I see with unwinding QE is that it has not done what it said on the tin.
This is not in the least bit surprising because it was such manifest folly no sane or rational person would have expected it to stimulate the economy.
What it did do, as you imply, is crank-up asset prices. The situation is therefore a double whammy hit waiting to happen. Asset prices are sitting on a cushion of fresh air with no underlying economic growth to back-fill that gap.
I suspect that house prices are reasonably stable where they are, (after ten years of back-filling) but the stock markets are ‘all piss and wind’. When that share price bubble starts to deflate (and particularly if it bursts) it will inevitably force a ‘correction’ in house prices aswell.
QE has been a ten year experiment in demonstrating that a piece of foolish policy is foolish. Trouble is it’s done some serious damage at the bottom end of the economy and there is potential for a lot more to come.
The clock won’t go back. We can only go forward by doing what should have been done in the first place and feed ‘money’ into the bottom, productive end of the economy, creating demand and encouraging investment, and hope to prevent the stock market crashing to everybody’s detriment.
So much of that stock market bubble is small-people’s life savings and pension provision that it will not punish the fat cats as severely as it will cripple the only moderately wealthy and ordinary employee pension fund holders.
There won’t be much scope for enjoying a bit of schadenfreude.
What I have to say is that, although some may see it as off topic, it is surely relevant to how our incompetent and callous government only adds to the pain for ordinary people.
As I have to deal with my son’s benefits, I enrolled with the excellent Benefits and Work https://www.benefitsandwork.co.uk/ support service as a means of being guided through the issues that, although part of government regulations, are absent from the guidelines that come with the various lengthy questionnaires that need to completed for individual benefits. This morning, I received their monthly newsletter which led me to an article in the independent http://www.independent.co.uk/voices/universal-credit-dwp-worker-case-manager-benefits-system-government-food-banks-a7998196.html.
While I have understood much of what has been in the public domain about the guidelines for DWP caseworkers, what the article reveals is so much worse than I would have believed possible. For a such a wealthy country to treat its people in this way enrages me. The bastards have to be removed, preferably forever, particularly clowns like Liz Truss who, when asked to give an opinion on the 55p per minute helpline, could only say that claimants, who surely can’t afford landline, should call the free land line number.
I am truly ashamed to live in this country.
Liz Truss was once my MP
She us that stupid
I use the word advisedly
And as she co-authored Brittania Unchained also that callous
I always understood that taxation was a fiscal rather than monetary mechanism, but I probably have that (amongst many other things) wrong.
If I understand it correctly, you want to increase taxes to reduce demand. But won’t that have a similar affect on disposable income as increasing interest rates, ? Not raising rates and reducing an individuals after tax earnings is surely equivalent to leaving the tax burden unchanged, but increasing that individual’s interest burden by increasing rates ?
This is really interesting stuff, and I am trying to learn all the time, so forgive me if I have misunderstool something.
I thought I had replied to this but it popped up again: apologies
I do not greatly distinguish monetary and fiscal policy as money and Rac are th flip sides of each other
I am not saying I would increase tax now. I can live with 3% inflation
I would be seeking to increase incomes proactively instead
That is the best leaver to pull here
There is always more than one lever to pull
Seeking to raise incomes is of course the desired outcome, but here we are talking about the Bank of England, whose mandate is based upon delivering 2% inflation. They don’t have a mandate to increase real earnings directly, but surely by reducing inflation, real earnings (nominal increase in earnings less inflation) would rise, which would fulfil your requirement ?
There is always more than one thing to think about
Real wages need to rise to reduce differentials with unearned income, wealth and house prices as well
So an inflation reduction is not as good
And the BoE mandate is wrong
Indeed, it should not have a mandate. Only the Treasury should have that
Getting back to theories about the BoE and what the hell they are thinking.
It is possible that a proposed interest rate rise is intended to reduce the price of imports (cost-push pressures) by strengthening the pound. Higher interest rates create demand for UK financial market assets (gilts, corporate bonds, short term bills etc) and as such greater demand for sterling.
Carney is from Canada a resource exporting country that has occassionally experienced Dutch disease problems (an overvalued currency) during commodities booms. Central banks in countries with overvalued currencies often get frustrated when other nations lower their interest rates making the home country more attractive to hot money speculators etc. So they generally think more about the exchange rate implications with comparative interest rates among nations.
Maybe he is applying the same kind of logic (reversed) where, in this case, higher interest = higher pound and as such lower import prices, therefore lower inflation.
I don’t know. I think its a workable theory.
In which case a direct exchange-rate intervention of some sort would probably be a better idea than a interest rate rise. Oh well..