The Guardian reported yesterday that:
The economy has flatlined and only a quarter of the impact from the Bank of England's 14 consecutive increases in interest rates has fed through, according to one of its policymakers.
They added:
Swati Dhingra, a member of the central bank's rate-setting monetary policy committee (MPC), said the full force of the steep rise in borrowing costs to 5.25%, after years of cheap loans and low mortgage rates, was only just beginning to hit household incomes.
Speaking to the BBC, she said she was concerned that millions of mostly young and poor households would be affected next year if interest rates remain high as expected.
Her fear is right.
The Bank of England even admits to sharing the fear. In another report a couple of days ago, the Guardian noted that:
Consumers are taking longer mortgages and spending more on credit cards in an attempt to adapt to higher interest rates and living costs, potentially storing up debt troubles in future, the Bank of England has said.
The central bank's financial policy committee (FPC), which keeps tabs on the health of the UK financial system, has seen evidence over the last three months of some households increasingly relying on credit cards to make ends meet.
That the Bank might be surprised about this is, of course, some indication of just how out of touch with reality they are.
It also indicates just how poor the assumptions that they use for modelling are.
The Bank will have assumed that rational people will have cut their spending in response to the pressures that the Bank is creating. Out in the real world, people will always borrow first to maintain what they have in the first instance. Apparently, the Bank does not know that.
What the second report also proves is that the concern that Swati Dhingra has is justified. Of course, the full impact of interest rate rises has yet to hit.
Not everyone has had to remortgage on new and penal rates as yet.
Not every landlord has increased rents as yet.
Savings have not been eliminated as yet.
And credit card limits might still have a little room in them, as of now.
But none of that is going to last. Things can only get very much worse as the Bank pursues its stated policy of keeping interest rates artificially high for a long time to come.
And what that means is that as Labour comes into office sometime next year, it will be facing the most almighty meltdown in the economy just as it says it will not tax wealth more, borrow more or spend more on public services as a result.
I hate to break it to Rachel Reeves, but every one of her own assumptions for government is going to be blown asunder by the scale of the crisis she is going to face when in No. 11 Downing Street, all of it created by choice by her old employers at the Bank of England. I sincerely hope she is scenario planning for it already, because she needs to be.
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And then kier will get ruthless, queue new chancellor and/or new governor……
And of course the Brexit import controls will have been implemented by then sending the cost of living even higher. I don’t think Reeves is anything like up to the job myself – but who in Labour, or indeed in politics, would be?
Good question
Darren Jones!!!
Who is proving himself to be utterly useless now he is a shadow minister, parroting yhe standard drivel and without a shred of economic understanding
Will Brexit import controls have been implemented. I was under the impression they were supposed to have been already, but the government keep putting it off. I don’t see them changing that behaviour.
Unless Starmer is enough of a sucker to do it as soon as he enters office?
Have they not agreed to go along with the EC controls? The government has at last realised how difficult it will be for the UK to have different measures for every EU country, and how much more expensive it will make imports and exports.
I imagine they’ll be bringing them before the next election which they anticipate losing, dumping all the problems effectively in Starmer’s lap. “We never had those problems while we were in office!” they’ll then chirp, and sadly, many will listen and be taken in.
Jenw, I think you’re thinking of some specific standards and their markings, the govt have indeed recognised that it’s daft having two sets, but I’m talking about the import sanitary/phytosanitary controls which should have been implemented long ago but weren’t as the nation didn’t have the necessary facilities/personnel/software/equipment etc (not that it does now either) and anyway, that implementation would mean existing and would-be exporters of all manner of goods to the UK would find themselves faced with a barrage of non-tariff barriers making life difficult to the point where many would, quite understandably, find better things to do. All this was agreed to in Johnson’s oven-ready deal but for obvious reasons not actually implemented.
Bill, I am concerned about all imports/exports, including animal welfare; being vegetarian, especially animal welfare. It’s the same, more difficult for importers/exporters to find out what the rules are, more costly to them to have separate agreements with each country. Why should the EU make it easier for a country that doesn’t want to belong?
I’ve spent decades eating organic food as I do not want my food contaminated with GM products. Now the rules for GM could be changing just because of brexit. I resent that.
I am also concerned that rules about live animal transportation could change for the worse.
I am not living a champagne lifestyle, I am just trying to Live! My house insurance renewal has increased by 54%!!!!!!!!!
All my insurance is up, considerably
I recommend the moneysupermarket.com to help you shop around. I got my coming years car insurance at slightly less than I paid for this year! Most companies are trying it on to increase their profit margins because they understand complete anarchy reigns under this current Tory grifter government!
What Swati Dhingra says is an orthodox view and probably shared by her MPC colleagues. The destruction of lives is ‘a feature not a bug’s.
Even if you take the view that spending power needs to be sucked out of the economy then high interest rates deliver pain arbitrarily and also crush investment. Tax rises could do it in a better way (if it needs doing) but are taboo in both main political parties.
Agreed
Tax is at a all time high vrs GDP so enough is enough..high interest rates deter leverage/ speculation in all assets and the removal of cheap credit deters spending beyond your means on new cars, expensive holidays, inflating further the already inflated housing market.. the list goes on…and inflation needs to be killed off it is so destabilised and destructive.
Tell me why it is worth crashing the economy to curb inflation?
What is more harmful, inflation or lives without hope!
And, how does interest cure inflation, precisely?
I do think that extremely low rates did encourage leverage and this a problem (read my comments over the last two years on the subject). I do think that low-ish inflation is desirable.
However, “one club golf” (base rate hikes) is not the answer. Tax, credit controls, rates policy across the curve all can all be used to deliver a better outcome.
But with inflation driven externally, and already falling, the lags in policy impact not worked through we are in real danger.
Much to agree with
The last 13 years consistently degrading and partially dismantling the public sector .
There is now a much greater difference between what’s needed to rebuild ( sewage in rivers, crumbling schools and hospitals, 7.7 million not getting medical treatment, local authority services, affordable housing etc etc) , and the means to do so.
Tax on the majority of people record high, as is ‘debt’ and public/private interest paymentsh.
As you suggst Richard, govt and Labour have talked themselves into a cul de sac , of needing billions but saying they have nothing.
BBC R4 did a 70 year review of ‘Question Time’ on the ‘welfare state’ – the assumed, but not spelt out framework being that the WS is just a ‘cost’ – which we can sometimes ‘afford’ and sometimes (or usually), not.
As one of your commentators said – ‘gibberish’.
Thank you, Richard.
Having worked with Bailey on and off since 2008 and knowing how political he is, I wonder if he has realised Labour will emerge as the largest party at the next election, so why not lay a trap for them, so there’s a repeat of 1974 – 9. That would be richly and deservedly ironic for Reeves.
I’m not a Bank of England employee or former in case anyone wonders about the pseudonym. I turned an offer to join them two years ago.
Making claims like this I think you need to send me proof of your identity to continue here.
This – “On Thin Ice”
https://oftwominds.com/blog.html
Is happening here
Interesting
Hollow words from the BoE interim analysis – the public will still be scalded by the masters of the universe for being wasteful and not reigning in their spending in the belief that only the rich who are able to store their cash and exercise more self control and are ‘better with their money’. Of course they’re better with their money – they have money to spare.
Banking has long used debt as a means by which to control spending. But today’s bankers use this by rote, not informed design without consideration of prices, wage levels and essentials.
To which one can only reply that why can’t so many people tie or associate money with morality? It is after all an evolutionary strategy that human beings benefit so much from being prosocial. What’s wrong with understanding that?
Prescient and chimes with what you are saying, Mr Murphy.
https://consciousnessofsheep.co.uk/2023/10/13/why-energy-prices-are-deflationary/
Just published by Tim Watkins.
Thanks
I’m really of the mind now that the country is in the same state as the time of the EU Referendum the vast majority of people still don’t do joined-up thinking when it comes to economics and politics. For example, ask them where Starmer will get the money from for the massive government spend required to put right the 13 years of Tory destruction and you can get no answers! Starmer will likely get voted into power on the back of a load of wishful thinking. Starmer very much therefore an idol for wishful thinkers!
The Chancellor is “hoping for the best, but …. [preparing] for the worst”. Ah yes, Micawber Hunt; something will turn up, because we are still trying to force inflation down, by pulling levers that penalise people who have nothing to do with the “shocks” that create it. But we knew that. He knew that. It isn’t funny, but Hunt should now be a public laughing stock.
He is also facing the consequences of the BoE’s blundering, incompetent policies that he insists in backing. Here is the revelation that was inevitable, but seems to be a surprise to him: “Debt interest is likely to be £20bn to 30bn higher this year than was predicted in spring. So yes, it’s a very challenging environment in the short term”.
Predicted five months ago; what sort of forecasting has he been doing? It was inevitable. I do not even need any detail to surmise that the two main factor are interest on index-linked bonds, and the interest on CBRAs. Both were bad policies poorly executed by the BoE.
At this rate the economy will not survive a catastrophic outcome, long before the election next year.
This guilty Government needs to resign – now.
Because so few in the country know that UK legislation provides that the government can create money from nothing post Attlee electors have been playing Russian roulette at general election time!
Could Prem not be part of the labour policy committee?
He might not want to be unless they change their ideas, but he could offer, couldn’t he?