I have already mentioned this morning the concern that Danny Blanchflower and I share that so many economists appear incredibly keen that interest rates in the UK be increased by the Bank of England.
There is only one reason for increasing interest rates. That is to reduce inflation.
Inflation comes in three forms. The first is produced by rampant demand that is driving prices upward. Raising rates can have an impact on this, with a very long lag involved because so many mortgages are fixed rate. The policy hits those on low incomes and who are younger the most as they are most likely to borrow. It is a blunt and regressive economic instrument that massively favours the well off.
The second cause is supply chain blockages, creating a supply shortage, pushing inflation up as prices rise in response. These problems are solved by sorting out the supply chain blockage, and not by raising rates, which may well exacerbate the supply chain problem by reducing investment.
Third, inflation is caused by exchange rate shocks, all of which in recent years have been domestically generated, largely around Brexit. The solution here is to get the politics right, and not increase rates, which never solves such issues.
The UK has very small risk of supply chain and politically induced inflation right now, but none at all of demand induced inflation. As Larry Elliott noted in the Guardian yesterday, ONS data shows that the recovery is losing momentum:
Card payments: flat. The number of seated diners: flat. Retail footfall: down slightly. Ship visits to the UK: down slightly. Daily flights: up a bit.
And on top of that 7% of UK employees are still furloughed and that scheme has a month to go. We face a massive unemployment hike that no one still seems to want to talk about.
And, as every serious epidemiologist I read agrees, the risk of Covid becoming rampant again this autumn is now massive. We are in for another period of inaction before lockdown has to happen again to protect the NHS, probably too late to save the lives of a great many people.
So where is the rampant demand, which is the only sort of inflation increasing interest rates can save us from going to come from? Precisely nowhere, of course.
And so why are so many economists demanding interest rate rises? That's a good question, and is why Danny and I are asking in whose interests these people promoting rate increases are talking, because it is certainly not for the ordinary person in the UK, for whom rate rises will be disastrous. They will also be disastrous for the economy as a whole in due course as the knock on effects lead to property price falls, negative equity, a banking crisis, bailouts and so to recession. Isn't it fair to ask why some economists might want that? Doesn't wishing the worst for the economy and country require some explanation? We think so.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
A possible hypothesis wrt interest rises is a shortage of goods, leading to price rises. The boss of the UK company “Iceland” was talking about Xmas being cancelled due to a shortage of lorry drivers. The shortage of drivers seems to be clear enough – & indeed, if this does lead to a shortage of “stuff on the shelves” prices indeed might rise = inflation? Just saying. More stupid things have been done in the past and I have no doubt that if enough economic imbeciles shout for a rate rise it might occur – after all UK serfs have never counted in the calculations of what passes for the ermm “UK government” & there is no reason to expect they would now.
So, my category 2, not solved by interest rate rises
As returns from “normal” economic activity are either stagnating or falling the banks are desperate to raise interests rates as commercial lending is not giving them the returns that their normal parasitic function gives them. Finance rather than industrial capitalism is trying to hold sway, unfortunately, we have a government in hock to them.
I think there is a perception that many people have saved in the last 18 months or so (not everyone, by any stretch, but enough to make a difference at a macro level) and at some point there will be a post-pandemic “boom” as people switch from saving to spending, and releasing some of the savings to catch up with some of the socalisation and entertainment, holidays, etc, they have missed out on recently. Perhaps that might happen eventually, but I don’t see it just yet. What I do see is shortages of goods in various sectors (not just food, or computer chips) mainly due to production and supply chain problems.
Agreed
I tell you if the do raise interest rates, it will not only be the most stupid thing in history but also daylight robbery by rentier society.
I’m incredulous – but at the same time I know that I should not be surprised.
It’s hard to say what anyone wants from the economy these days with so many conflicting ideas that just make everything a mess for the majority.
“as every serious epidemiologist I read agrees, the risk of Covid becoming rampant again this autumn is now massive.”
Professor Paul Hunter does not agree. He has said that “I’m very confident that we’re not going to see anything like the amount of disease we saw last time round”. He’s basing his view at least partly on the fact that “Office of National Statistics figures show more than nine in 10 adults in the UK now have antibodies to coronavirus, either through vaccination or having been infected with the virus.”
Perhaps you don’t think he’s serious?
“Paul Hunter was the first professor of health protection to be appointed in the UK and is a specialist in Medical Microbiology. He works on outbreak response, emerging infectious diseases and infection in complex emergencies. He has contributed to national and international public health policy and is the methodologist to the WHO guideline development committee on drinking water quality and currently leads the knowledge and evidence group within the WHO/UNICEF global action plan on Water, Sanitation and Hygiene in Health Care Facilities. He was also a member of the UN interagency Watsan group advising on aspects of managing the 2014-2016 Ebola Epidemic in West Africa. His research has directly influenced WHO guidance on drinking water safety and on hygiene practices within Ebola Treatment Centres.”
Or perhaps you just won’t read anything that challenges your desperation for disaster?
Or I suppose simply because he (and many others) disagree with the doomsday scenario you so wish would come true, you will dismiss him and them as a neoliberal troll fascists?
If your hoped for apocalypse doesn’t materialise, you’re going to look so stupid.
Paul Hunter is not on my list of serious epidemiologists
A very long way from it, in fact
I think the whole of Independent Sage might be in the same place – many exopleicuitly are
See also the contemptible way he dealt with Dr Deepti Gurdasani to get a measure of the man
It’s perfectly reasonable for people on negligible income to expect a return on their savings at a rate comparable to that of inflation. That dwindling sum is all they have, with no prospect of earning any more.
The policy of zero interest rates can’t be sustained, since it’s driving up house prices & household debt. And as someone that’s had negative equity and sold at a loss, house prices need to be significantly reduced.
Why should people expect an unearned return?
Why has every major religion condemned this?
Why don’t we when savings do not contribute to macro well being ?
Sorry, but I am saying please justify why you want unearned reward
“Why should people expect an unearned return?”
A return less than inflation is not “unearned”, it is in fact a real terms loss. For as long as interest rates remain below inflation, borrowers are being subsidised by depositors.
Simply not true
Tell me why simply leaving money aside for use on enother occasion should require reward when savings are not the basis for lending now?
Please provide a reasoned justification
Richard,
I like your comment
Why should people expect an unearned return?
Why has every major religion condemned this?
I understand that the idea underlying the religious condemnation of ‘unearned return’ is not simply a theological but a practical one. While some of the constraints of BCE Societies are different to now it seems to me that there is a good reason to revisit these ‘condemnations’ and the ideas behind them to make them fit todays economy which seems excessively biased towards the unearned rather than the earned.
There are some occupations that are seasonal such as hospitality in tourist areas where you only have a few months to earn your income for the year. In this instance it is reasonable that savings sustain their value for the remainder of the year.
Someone who is made redundant and has to rely on savings to get through a period without work would like to see those savings maintain purchasing power.
The disabled who have to supplement their income from savings.
Pensions.
Admittedly this doesn’t cover many people but it is a reason. The way to combat this is of course to have proper unemployment benefit and a proper State pension that means people can have a reasonable standard of living even when they are unable to work.
But that is a discussion of inflation, and not interest
But wouldn’t you simply budget for this if that is the way you work?
I have known quite a lot of people in this situation – none ever raised this issue
Sid
All you speak of (and Hunter too it seems ) is relevant only in that it is based on the virus as it was when the vaccine was rolled out. It’s out of date.
Where it might come unstuck is if there is a further mutation or a series mutations that result in a weakening of the vaccine.
Why do you think there is talk of booster jabs?
And erm, you do know that summer does not last forever and that NHS wards are busy even now before the flu/pneumonia season starts in late Autumn/Winter?
Don’t forget (and it is more or less stated in the book ‘Failures of State’) many more people died at home of Covid than in hospital.
This year, they might have more of a choice of what to die from. But not being able to get into hospitals that are already too busy will contribute like it did previously.
I don’t want any of this to happen BTW, nor does any ordinary human being.
It’s just that Boris and crew has screwed it up once and he’s more than capable of doing it again. And again. And again.
Rates should be higher… but a rate rise would be nuts.
What do I mean? Well, raising rates is wrong for all the reasons you identify. (Full stop).
The problem is that the current level of rates is promoting asset price inflation and speculative bubbles. Rates were only put to zero because in the current neoliberal world it was the only tool available.
We DO have other tools and we should use them. Credit controls, differential interest rates etc. along with spending and tax policy.
This should not be a one dimensional debate.
We need to reduce the tax subsidy to saving – most especially for those already well off
By far the easiest thing to do
Yes, absolutely.
Does an interest rate hike benefit the banking sector with an immediate cash bonus requiring no effort or expertise? If it does, perhaps the enthusiasm for it is best explained thereby!
They think it does
My posts here are from curiosity in a subject I often prove I know little about – so my comment is in the nature of questions rather than assertions.
It seems to me that central banks get nervous when their base interest rates are (a) out of approximate alignment with other central banks they consider comparable and (b) significantly divergent from underlying inflation. I don’t know why, it isn’t obviously an immutable physical law, but it is a pretty consistent observation. But as a result why is it wrong to assume the Bank of England will want to move base rates towards 0.5% (similar to the US and Euro zone) over the next couple of years, though in a piecemeal way that “doesn’t scare the horses”, with a longer term aspiration closer to 2%?
And while I can see there are strong arguments against tax incentives favouring unearned income, why should that also apply to interest which simply sustains the real value against inflation? For example I think it is quite legitimate for a government to consider it a valid social good to encourage people to maintain a modest emergency fund (newspaper articles seem to suggest enough to cover 3-6 months income) and thus aim for interest rates on cash which ensure there isn’t the disincentive of losing money in the process.
Jonathan
You are right to suggest central bankers move as a herd
But in that case why do they all want to impose recession on the economies for which they are responsible?
Your argument goes along the line of if one person murders another might too
My argument is that if murder is wrong one person committing murder does not exonerate another doing so
Richard
I realise you would argue differently if you helped run a central bank. But then that may be why you haven’t been invited to join the MPC…..
Nevertheless my naive mind can’t help worrying there are undesirable effects of interest rates too far below inflation. It seems odd to penalise the financially conservative who prefer to save up for big-ticket purchases rather than take loans, and I can’t help thinking the current situation where mortgages can (reportedly) be obtained at negative real interest rates may be creating future risk.
But tell me this then; what rational reason is there to pay someone to do nothing with their money when that money is not required to make loans and they will save anyway, as current evidence proves?
Inflation has soared in 2021 and it is highly unlikely to vanish as quickly as it appeared given the structural changes (War against Inequality) and pandemic unintended consequences (supply chain dislocation); in the past 6 months the annualized rate of CPI inflation was 7.8%, of core inflation was 6.8%, US house prices was 19.7% (May) and “pipeline inflation” PPI’s are popping higher in US/China/Japan.
Did you read what I wrote?
If so, in what category of economist are you?