It is widely expected that the Bank of England will increase its base rate for the fourteenth time since 2021 when it meets tomorrow. Whether that increase will increase the base rate to 5.25%, or 5.5% is the only issue on which most commentators are speculating.
As I have told journalists who have called me on this issue, if I were on the Bank of England monetary policy committee, I would be voting for a cut of at least 1% on Thursday. I would also be indicating that this would be the start of more cuts to come.
The grounds are quite straightforward.
Increases in rates have already gone too far.
It is apparent that inflation is now falling.
The impact of the rate increases in the system that have not already had any time to take effect are still in the system and may already be deeply recessionary in their impact.
In that case, no further increases are now necessary to reduce inflation, if such increases ever had that consequence.
Continuing high interest rates are instead causing a growing financial crisis.
Households are unable to meet their cost of living.
Personal indebtedness is rising.
The cost of mortgages is breaking the financial viability of many households.
The impacts on the property market are already being seen.
Rental property is being withdrawn from the market with significant social consequences.
The risk of a banking crisis is real.
Businesses are suffering undue stress.
Inflation is being fuelled by rising interest costs.
There is literally no remaining logic that could justify an increase in interest rates this week unless, that is, the goal of the Bank of England is to create a recession as a consequence of which they believe that continuing strongly positive interest rates might, somehow, be accepted as a market norm, whatever the social impact that those strongly positive interest rates might have.
And to contextualise this, I make clear that there have not been positive interest rates within the UK financial markets since 2008.
Homeowners are now wholly unaware of what they mean with regard to mortgage payments.
Similarly, very few managers now running UK businesses have any idea what it means to pay net real interest costs upon their borrowing.
The mindset of positive interest rates simply does not now exist.
It does not even exist in banking, where the willingness to pay such rates to savers appears to be almost non-existent.
In that case, what the Bank of England is trying to achieve with its policy is unfathomable.
What I would be trying to achieve with my policy is, in contrast, easy to understand.
I would be seeking to avoid a recession.
I want to keep people in their homes.
I want to cut the cost of living, which rising interest rate rises are fuelling.
I want to prevent a banking crisis, a private debt crisis, and a business debt crisis.
I want to, in other words, prevent the financial mayhem that an out-of-control financial services sector can reek upon an economy.
The trouble is, I have a little doubt that I will be ignored tomorrow. That out-of-control financial services sector will, instead, get its way.
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:
“the reluctance to pay such rates to savers appears to be almost non-existent” – I think you mean willingness instead of reluctance. 🙂
The moral is do not edit the latter part of the sentence in isolation.
Changed. Thanks.
The root of the problem is that it (wrongly) became “accepted wisdom” that monetary policy could control inflation. This thinking was fostered by the moderate level of inflation prevailing for the last 20 or 30 years until 2021… although in fact, inflation was moderate for other reasons than central bank brilliance – although they were happy to take the credit for it. This now coming home to roost.
Once inflation rose it was assumed that it was the BoEs fault and that the solution lay in their hands… hands that only knew one tool (interest rates). So, in an effort to be “seen to do something” they hiked rates and kept hiking as long as there was a clamour that “something must be done”.
First, it shows ignorance about the nature of the inflation we have experienced.
Second, they are caving into pressure even though they know that the hikes already implemented are almost certainly more than enough.
Third, we have a government that is quite happy to say “nuffin’ to do with us guv” when in fact, they do have the tools to help control inflation and cushion the country from its worst effects.
We need a BoE with a brain and a backbone to “do the right thing” but we currently have bank leadership that lacks both. We also need a government that first accepts that it CAN act to help (oh, and a brain/backbone would be handy for them, too – but I guess that is asking too much)
The consequence? as you say – unneeded pain.
Much to agree with.
I like the sound of “reeking financial mayhem”. Something bad smelling about the Monetary Policy Committee’s decision making.
A quotation from Ann Pettifor. ” LIttle has been done since the 2007-2009 crisis to remove control over rates of interest from commercial banks. Despite falls in central bank rates since then, commercial banks continue to set and determine high real rates on loans and overdraughts for individuals ,households and firms in the real economy. Journalists and commentators mistakenly continue to couple central bank rates as if low rates apply across the board. Few entrepreneurs can borrow at the central banks current rate.” She goes on to say that banks are oligopolistic so there is little competition. This is rarely discussed in the media. Democratic control over the banks is essential.
It’s not a deficit of brains that’s the issue. I think both the government and the BoE know exactly what they’re doing and the consequent harm it will be doing to the ordinary citizen. They don’t care. They don’t need backbone because they know that the general populace have neither the power nor seemingly the intent to do anything about it. They are safe – emboldened in fact by the continuing show of apathy and acceptance by the public. Hell, if they have gotten away with 14 consecutive interest rate hikes with barely a whimper, they surely must be assembling an expanding list of all the other places and means whereby they can extract yet more wealth. Like the vultures that they are, they wont stop until every bone has been picked clean.
The UK is corrupt as hell and the vast majority kid themselves it isn’t largely because they’re ignoramuses!
Just a thought with the tight employment market and the willingness of workers to take industrial action to try to reduce the harm to their living standards , could the BoE be setting out to cause unemployment to increase and create a pool of reserve labour to reduce the strength of organised labour. A simple class war strategy?
Plausible
9th line from bottom “What time would be trying to achieve…..” Typo?
Edited
Thanks
Richard, under what economic circumstances in the UK would you support high interest rates (i.e. at or around the level we’ve had for the last few months)?
Or are there no such circumstances and would you have them permanently at the level they were at from 2009-2021, because there are always other economic tools that have the same benefits without the negatives?
Interest is rentier activity. Why would we want to encourage that when fiscal policy is always better targeted?
Being simple-minded here. Raising interest rates makes things worse for those who have litle flexibility in what they need to spend in order to survive. It gives more money to those with savings who can choose to spend or not spend. Why is giving more money to those who can afford to spend it expected to reduce inflation? Where something is inflexible, a measure can have little effect. Where something is flexible, a measure should have a larger effect.
Same question as I put to you before : how is it Richard that your such obvious excellent expert financial acumen, and the common sense of us lesser experts, gets so blatantly ignored by the unelected Andrew Bailey & Co. and likewise the Treasury led by Hunt who in the old days of witty protest banners galled at the inscription “Thatcher Has One and Hunt Is One” ?? When I put your analysis and proposals to Bailey and the B 0f E, after my monthly mortgage has in the past six months gone up by 54% from £310 to £480, the reply I got was that they have to obey whatever ‘global financial market forces’ tell them. So, once again, to hell with parliamentary democracy and all praises to global capitalism and all that it does to ensure the super rich in Monaco and the Bahamas never have to leave their multi-billion pound mansions/ yachts for even a day’s imposed ‘work’ ! When on earth are we all going to put solid action together to change this obscene situation where the ‘disease’ of rampant capitalism, not only is responsible for such immorality, but its self-indulgent family and individual material greed now also drags all life on Earth to a final ‘sixth’ extinction – AND within THIS CENTURY’s current fast-developing climate and ecological inevitable Armageddon, assuming Oppenheimer’s feared international nuclear war doesn’t achieve it first ! ? Pity, I’m 83 and could miss all the suffering !
In a meeting at work yesterday, I was confronted by two popular myths held by two more highly paid individuals than me (senior in pay grade):
1. Utility price rises are caused by green policies apparently.
2. The reluctance to pay higher taxes for more investment to reduce costs because taxes pay for everything – apparently.
I said that if a government can print money for war or for the 2008 crisis, the genie was out of the bottle and they could print the money for other crises too.
The look of total disbelief prevented me from mentioning the modern role of tax (to act as a brake on inflation).
It was quite depressing to be honest.
On the issue of the BoE, I concur with Richard and also Clara Mattei (The Capital Order, 2022) – the BoE’s behaviour is calculated to undermine the labour supply and is a symptom of the ongoing austerity policies advocated by ‘independent economic experts’.
Just a quick word about the planning system and its effects on housing provision.
On one of my schemes in a large town in the Midlands I am building a number of new homes in an area with existing, older stock. As part of the planning requirement for the new to fit in with the old, the planning authority is making us fit fake plastic chimneys to new homes built without traditional fires.
Fake, plastic chimneys on homes with air source heat pumps and underfloor heating!!
This is where we need to reform the planning system folks.
I mention this as I’m really worried about the loss of green space in our country and I have been building on brownfield sites. However, brownfield sites are expensive because of the remediation of contaminated land.
The Tories ended the state grant regime supporting remediation in 2017 – I’m not sure if Gove has resurrected it yet – there is nothing on Gov.UK – but this means that if planning rules are relaxed it will be open season on our countryside by developers because it is cheaper and less risky to deal with green sites than brownfield.
This means brownfield sites will also be likely to be left to rot.
So, anyone advocating for housing needs to consider this carefully. A decision to open up the green belt will only benefit developers and also a State that does not want to invest in. anything.
Food for thought.
Thanks
The sheer lack of will by BBC economic correspondents to even mildly query the totemic ‘interest rate is the only the only tool we have’
– a) is it? No!
and b) does it actually work ?- No!
At the end of some session they may field the TUC economist to query it , and Paul Johnson did eventually mutter ‘you might use taxes rather than just interest rates, but what politician would do that’?
Somehow the official perspective is all too embedded by then
I listened to DeAnne Julius being interviewed on R4 Today today. Ex-BofE MPC and a go to for economy interviews. Challenged on the impact of the multiple increases in mortgage rates she said well that’s fine, people know what’s coming so they can plan for it… as though everyone has a raft of spare cash to pay the major increases. Utterly deluded and detached from the realities for people whose mortgages leave little spare at the end of the month. Like Huw Pill the BofE Chief Economist saying people just need to accept that they will be poorer. Unless they are rich enough like Pill or Julius not to have to worry.
And these are the kind of people setting economic policy…
Full disclosure – in the past I’ve had to interview Julius a number of times. I’m not surprised…
The indifference created by wealth….
The BoE has raised interest rates to 5.25%; it argues to reduce inflation.
Here is what the Bank wrote today (BoE website):
“This page was last updated on 3 August 2023
Why is inflation high?
High inflation has been caused by a series of big shocks to our economy.
The first shock was the Covid pandemic. While people had to stay at home, they started to buy more goods rather than services. But the people selling these goods have had problems getting enough of them to sell to customers. That led to higher prices – particularly for goods imported from abroad.
The second shock was Russia’s invasion of Ukraine, which led to large increases in the price of gas. It also pushed up the price of food. Poor harvests in other countries made the situation worse. Food prices in June were 17% higher than a year ago.
The third shock was a big fall in the number of people available to work. That was linked to the Covid pandemic. It’s meant that employers have had to offer higher wages to attract job applicants. Many businesses have had to increase their prices to cover those costs. That includes firms in the services sector, where wages are the largest part of businesses costs.”
Only the third of the the three shocks even mentions wages. Notice the wage rises are an effect of a fall in the available Labour stock, not a direct cause of inflation. notice that other cost pressures, market pressures or shortages as a consequence of Brexit or other supply or cost effects still affecting the economy, from externalities are even mentioned in explanation of the third shock. Nor are the adverse effects on inflation induced by rising interest rates mentioned
What this means is that externalities are the principal causes of inflation, and as they wash through inflation will fall, whatever the BoE do (but of course the cost of living will not fall unless there is deflation). This is the implication of their own explanation in their website; right up front. In short a very poor case is being made by the BoE for wage driven inflation requiring interest rate rises.
I rest my case, and my thanks to the BoE for making my case for me.
Agreed
Did you see my article in The National today?
Forgive me, I regret the paywall scuppered that!
Agreed too.
The BoE and the BBC keep banging on about wages needing to ‘stabilise’ as if it is a labour supply side problem, but what I note is that EMPLOYERS are raising wages voluntarily to attract or retain staff – it has even just happened to me ( I did not ask for a rise – I was given one!) and we have lost good staff to these employers in the private sector offering still less than inflation wage rises, but more than the public sector. This of course puts up their costs.
But what is also being noted (belatedly perhaps) is that low wages are also hurting turnover and profits in the business sector as well as those high interest rates the longer this drags on -whether Wilko or Apple.
This stupidity and adherence to the received wisdom of what is causing inflation is nothing but self serving propaganda – it has no substance at all.
This has got to be a new low in our society.