The Bank of England will be raising interest rates today. They are likely to increase their base rate from 3.5% to 4%. There is no guarantee that this will be the last such increase. And there is no reason for this to happen, whatsoever.
As I have said time and again, and as is already being seen in the inflation data for the USA, EU and the UK, the inflation rate is falling. That is inevitable, and the trend is going to grow as post-Covid price pressures fall out of the system and as the one-off price hike caused by Putin's war falls out of the index calculation whilst leaving prices well above where they were a year ago.
Given that we know interest rate increases take up to two years to have any impact on overall price levels, no interest rate increase anywhere in the world has had any significant impact on inflation rates as yet. Inflation is falling despite interest rate increases, not because of them in that case.
That is, anyway, inevitable. Inflation caused by the impact of war elsewhere in the world is not going to be impacted by changing the interest rate in the UK. There is no link between the two. That makes the interest rare rises we have had most especially pointless.
Worse than that, the claim that these rate rises are required because of tight UK labour markets is also absurd: those markets are only tight because of, in the first instance Brexit and, second, because so many people have been forced into low paying part-time work they cannot break out of by benefits rules. High interest rates do not, again, solve either of those issues.
In that case a wise Bank of England would be considering the evidence and not the dogma today, and would be cutting rates. That is because the reality is that the UK economy is very weak and, according to the IMF, is uniquely heading for recession this year, meaning that what is required now is an economic stimulus and not an economic clampdown.
The right course of action today would be a significant interest rate cut. One per cent would do for starters so long as the signal was given that there was more to come.
That way the message would be sent that the government is intent on recovery. The message that inflation is going would also be signalled. The government would also win by sending a clear message that help on mortgages on rents is coming, which will follow from falling rates. And the demand for pay increases would reduce. Wins all round for the government then.
Is there any chance, however, that such a sensible policy will be seen today? I think that chance as close to zero per cent as it is possible to get. Instead the economic civil war on the country will continue.
One day we might get someone in charge with some economic sense. But not yet, I suspect.
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“we know interest rate increases take up to two years to have any impact on overall price levels”
What does that mean please?
The price of housing has started to fall already and interest rates were below 1.5% until August. House prices among many things feed into any natural definition of price level. Other indicators are showing a small difference too. Do you have a source for it taking up to two years for the impact to be ‘any’ at all.
That lag is widely recognised in macroeconomic literature
It simply means that there is no direct link between interest rates and inflation
Instead, the pressure increased rates bring to bear take some time to have any real impact on demand and so reduce prices
That is it
And house prices are not in the inflation data usually referred to
The old chestnut of house prices.
I agree with the narrative that the BoE increasing IR’s is like a blunt instrument. The current inflation is caused by speculation from events that are now working its way out of the system. It’s like the lie of the Tories that inflation will halve in the next 12 months. Yes, it would have done that even if the BoE and Govt had done nothing. The Tories will try to take credit for it though. Just another lie.
But I have mixed feelings.
House prices have fallen 5 months in a row. Would they have fallen without the increase in IR’s? I doubt it.
https://www.theguardian.com/business/2022/mar/31/uk-house-prices-grow-at-fastest-rate-for-17-years
Since the pandemic began the average price of a detached house in the UK has gone up by £69 grand. Utter madness.
Therein lies the problem. Since 1979 house price inflation has mostly outpaced official inflation – by miles. Low IR’s and a total lack of commitment from mainly Tory Government’s to build affordable housing is to blame. The Tories don’t even use the word “affordable” anymore. Labour are not much better. I remember Prescott as Housing Minister and his £60 grand homes farce.
https://www.bbc.co.uk/news/business-14410589
Same old, same old. We are sleeping our way through the greatest crisis on our well being still to come.
IR’s can be raised or lowered, at the flick of a switch by the BoE, effecting the housing market almost immediately. A plan to build more affordable homes takes years, assuming the political commitment which has been totally lacking since 1979.
Tories won’t do it, but what about Labour?
I had a quick look and found this quote from Lucy Powell the Shadow Minister for housing.
“Labour is the party of home ownership, the Tories are the party of speculators and developers. The Conservatives’ failures on housing today mean that they don’t have the answers to solve the challenges of tomorrow. They treat housing as a commodity, not the bedrock of stable lives and life chances.”
https://labour.org.uk/press/labour-announces-tough-new-powers-for-communities-to-tackle-housing-crisis-and-give-first-time-buyers-first-dibs-on-new-developments/
Labour is the party of home ownership? Lucy, it’s affordable housing to rent that is needed and lots of it. Ever heard of Council Housing? Go back and look at what Labour did post 1945. If this is their policy, New, New Labour will fail just as bad as Prescott.
Thanks
Financial markets (Bonds and stocks) may react quickly but housing does so with a lag. In this case, BoE tightening started in Dec 2021 and house prices peaked in August 2022 – a 9 month lag. The “real economy” (butchers bakers and candlestick makers) responds with a further lag. We know empirically that people respond to circumstances in front of them – I have yet to meet anyone who, when invited out for a beer, has said “hmmm, the BoE raised rates today, it might impact my employer so I might get laid off. My mortgage re-fixes in 18 months time, too. I will pass”. I have however had people say “I just lost my job and my mortgage payments are up sharply, I will pass”.
The two year lag is widely accepted… but may possibly be a little out of date as everything in the modern world seems to move more quickly. But even if you shorten to 12 – 18 months the BoE is still slamming gates well after the horses have bolted.
Fair comment
It is customary though is it not in English financial services and policy to treat the inherent weaknesses as an excuse to squeeze more rent out of it rather than help?
The government seems intent on pummelling us into submission. I’m so relieved that we paid off a our mortgage so quickly but also seeing any gains as a worker I’ve had immediately get claimed by something else – now it appears to be water bills – it’s disheartening to say the least.
And all we hear about is inflation – yet thinking about water bills now, why are we not also mentioning ‘profiteering’?
So government creates fear about ‘inflation’ amongst ordinary working people but says little about its mates and backers in the corporate world price gouging and making huge profits out of the crises. Out of markets they say they regulate!!
Again, this is why we must back the strikers as in your previous post.
Who is the BoE accountable to ???
They are not elected and are allegedly independent of the government. Who are these people to impose poverty on people with little or no justification ? Whose interests do they really represent ? The City of London and all its associated financial shenanigans – that’s who ! How do we get them replaced with a fair representation of the country ?
An Act of parliament would be required
We won’t see such a move with this travesty of a government, unfortunately.
For all the many well reasoned arguments put forward over quite some time, I do think that maybe it is time to call for Andrew Bailey to be replaced. The logic of increasing interest rates at this time is nothing less than incompetent…notwithstanding he is sticking rigidly and un-intelligently to neoliberal, monetarist dogma.
Maybe a petition to the UK government? Even though house prices are not necessarily the main issue here – it is the wider impact on society – it is something the ‘man or woman in the street’ can get behind…or should get behind as he is essentially leading us towards economic decline and, possibly, ruin.
A rise is inevitable, since they follow a logic of their own – different from yours.
I guess the interesting questions are whether the minutes of the meetings will reveal the presence of anyone sensible even if they are outvoted. And whether the decision of the US Fed might make them pause and think rather than blindly adding another 0.5%.
Two external women opposed the increase
Odd that…..
Interest rate rises typically feed through two years on, what can we expect in 2025 as a result of this?
Deflation
Recession
Gilts trade higher after the rate hike.
Base rates at 4% now…… but 2 year gilt yields are around 3.25%. This tells you very clearly what bond traders think.
Why would you “lock into” 3.25% for 2 years if the rate paid on reserves is now 4%? Well, only if you believe base rates are going to fall. They think that rates will have to fall fairly quickly and sharply once the current “scorched earth” policy has run its course.
2 year rates at 3.25% suggests markets are priced for the base rate to average 3.25% over the next 2 years. Given we are currently at 4% it might imply that base rates will be back at 2.5% by 2025.
This then begs the question, if the consensus is that rates will be done at 2.5% in a couple of years, what was the point of going to 4% now?
Agree with all that
Including the questions
And, bizarrely the BoE even acknowledge these market trends in their report today
Staggering
Hi Richard
Can you explain why Turkey, which seems to be the only country to be cutting interest rates, is experiencing runaway inflation? I am sure that MMT must explain it somewhere. Also, Turkey has been raising government employee wages but has not been able to keep wages ahead of inflation. It has been reported that
“Besides the upping of the minimum wage, the government has been on a public spree to compensate workers and pensioners for their deteriorating purchasing. Earlier this month, civil servants and pensioners received a 30 percent pay rise.
Nonetheless, these increases remain a seeming drop in the bucket as the pay rises remain under the inflation rate. ( Bianet )”
Have you notice anything else odd about Turkey that might suggest that things there are not going too well?
Could it just be you’re either a) trolling b) looking in the wrong place for your answers?
I suspect the answer is (a)
Just had a look at the BBC News site to find out about the rate rise.
In view of the recent discussion about BBC reporting on economic matters I find these consecutive sentences somewhat infuriating:
“Higher interest rates are meant to encourage people to save more and spend less, helping to stop prices rising as quickly.”
“Thursday’s hike in borrowing costs is the tenth in a row and will add pressure to many households already struggling with the cost of living.”
For a start, what planet are they (BBC reporter) on where UK citizens are indulging in a wild overspending spree? could they not have queried this?
Then, how does the first sentence relate to the second, where people patently *aren’t* overspending? Does logic completely elude them?
As noted in a report this week, bbc economic commentators are frequently incoherent
“Have you notice anything else odd about Turkey that might suggest that things there are not going too well?”
Apart from hyperinflation, low interest rates, wage rises that cannot keep up with inflation? You are the expert, why can’t you just tell me why cutting interest rates acts to reduce inflation?
It’s really odd how trolls are so demanding
You are now banned