I posted this thread on Twitter this morning:
The Bank of England will increase its base interest rate today. It may do so by 0.5%. It could do so by 0.75%. Whichever it is, the move is wholly destructive and will cause misery in the UK economy. A thread....
The Bank of England base rate is used to signal to other banks the rates that they might wish to use on their lending within the UK economy. The biggest part of that lending is for mortgages.
The result of this increase, when it feeds through into mortgage rates, will be cost increases for the average mortgage of more than £1,000 a year in payments due.
As part of a series of increases that might raise the base rate to 4% (in the market's expectation), this increase could increase costs for average households by around £7,000 a year, in my estimate, based on a start point when base rate was 0.1%.
Clearly, this is unsustainable for most households. They will not be able to pay that increase, which will represent an increase much bigger than any energy bill. So far we have heard nothing about any support for those impacted.
And it is not just be households that will suffer. Many landlords borrow to fund their property purchases. They, broadly speaking, try to increase rents in line with their mortgage costs. So tenants are going to have a bad time too with many rent increases likely.
Small business will be in the same boat of course: they will see interest costs rise rapidly. This cost increase will come after news of the weak energy support package announced yesterday.
Many of the vulnerable sectors of society will, then, be challenged by this interest rate increase. So why is the Bank of England doing it?
The first thing to say is that this increase will not stop inflation. UK inflation is largely being driven by energy prices and they are set on international markets and nothing the Bank of England will do will change them.
Nor will this increase have any signifiant domestic impact on inflation. The majority of UK households will already have nothing extra left to spend this winter and so will not cut their spending further because the Bank of England has increased interest rates, because they can't.
This is not what the Bank of England think though. When they raise interest rates it is because they think there are consumers who have excess money to spend who most have that spending power removed by interest rate increases. That's how they think these rate rises work.
The reality is that few people are in that situation right now. It is, I suspect no more than 20% of households who are. They are the top income earners of all. But many of them will not have mortgages because they're also the wealthiest, and older, people in the economy, and borrow less on average.
Their spending patterns are also not greatly impacted by such things as interest rates: since they are savers and not borrowers in the main (which is why they're wealthy) few will be pushed to the limits of their available funds by this move and so cut their consumption spending.
This move will then have almost no impact on the excess spending that the BoE thinks drives inflation barring one thing which is that the US Federal Reserve raised rates by 0.75% yesterday, and so unless we do the same the BoE thinks the value of the pound will fall still further.
This matters because oil and gas are priced in dollars. So, if the pound falls then the price of UK oil and gas rise. As a result the Bank of England says it has no choice but raise our rates.
Because the Fed are trying to drive the US economy into deep recession to beat inflation by massively increasing unemployment the BoE says we must too. Collective madness prevails here, and we are all going to be victims of it.
That's why @D_Blanchflower and I have called for changes in the selection of candidates for appointment to the Monetary Policy Committee of the Bank that sets these rates.
Why else might the Bank raise rates? It has to be said that it's because doing so favours the City very nicely, of course.
First, commercial banks will be increasing their lending rates but not their deposit rates by anything like as much. Big profits follow.
Then there is the fact that these commercial banks have big deposits with the Bank of England as a result of quantitative easing. They are around £900 billion right now. If rates increase 0.75% today that is £6.75 billion they will earn on these funds in the next year.
That cost will, of course, be charged straight to the government. The banks are looking to have a great time. No wonder they want an end to the cap on bonuses! Inequality is, as with everything the Truss regime does, set to increase.
But, let's look at the problems in all this. First, this increase will not address any of the real issues creating inflation.
Second, it will force millions of households, whether with mortgages or who rent, into increasing debt and many might also lose their homes.
Third, if households are insolvent and have to hand their properties to their bankers, or if landlords try to sell properties they can no longer make pay, then there will be a property crash. These are bad news: property prices are way too high, but crashes always create victims.
Fourth, banks will then in turn be in trouble. The 2008 crash began in the US mortgage market: the next crash in the UK could start in the UK housing market because of families stressed beyond limits by debt.
And in the meantime, government finances will have been stressed by excessive and unnecessary interest rates.
So what should the Bank of England be doing? First, they should look at their own forecasts, which show that they expect inflation to be gone within two years. This is entirely rational: energy prices simply cannot keep inflating for that long.
I stress, that this does not mean energy prices will necessarily fall, but it does mean that it is very likely that they will stop fuelling inflation within two years. The inflation rate could as a result be back below 2% by then.
But, what we do know is that price increases before that happens will have been massively damaging for the economy as a whole. That is obvious now.
We are going to have recession, household stress, massive private sector debt increases, increasing unemployment and homelessness before inflation goes.
All rate increases can do is make this situation much worse, and possible very much worse. So they are the wrong policy, even if the Fed does insist on increasing rates.
The right policy is to anticipate what is going to happen in the economy, which is a task the Bank of England should be capable of doing, most especially as it knows that all interest rate changes take time to work though before they have real-world impact.
Looking forward the threat in our economy now is not inflation: that will pass without intervention from the Bank because energy prices will stabilise, or most likely fall (as they are on world markets now). Instead the threat is recession, and a debt crisis.
What is the right response to a forecast of a recession and a debt crisis? It is to cut interest rates. And that is exactly what the Bank should be doing today.
An economy heading for recession needs the lowest interest rates it can have. Instead the Bank of England is going to increase them, guaranteeing that the economy of the UK will be very much worse off than it needs to be.
Today's rate rise from the Bank of England will be callous, misguided and wholly unnecessary. It will consign millions to misery, and it will have not impact of any significance on inflation, which supposedly motivates it.
There are moments in history when you can say economists get things very badly wrong. Today will be one of those days, and the economists at the Bank of England will be responsible. I suspect they will be rewarded with a big bonus. The rest of us will suffer.
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Danny Blanchflower was on the MPC in the run up to the crash in 2008. He is lauding on twitter Gordon brown, who I personally like a lot but the fact remains the treasury and the bank of england allowed an incredible increase in the money supply fuelled by mortgages on an unprecedented scale. Credit was ludicrously easy. Northern Rock were allowed a loan to deposit ratio of over 300%!! You were allowed to put a tiny deposit down (5%) and take a loan of 124% of the property value and to cap it off I remember self certified mortgages for the self employed where individuals did their own credit check !! Reckless lending like this was prevalent across most banks as we eventually found out..so really Danny needs to observe his own actions as he was an insider to boom bust on a monumental scale.
Look at Fanny’s track record on the MPC rather than make stuff up
Re Danny and his tenure at the MPC, what have i made up?
Note how he voted
Typo alert!
Danny’s track record?
Of opposition
Danny Blanchflower was on the MPC in the run up to the crash in 2008. He is lauding on twitter Gordon brown, who I personally like a lot but the fact remains the treasury and the bank of england allowed an incredible increase in the money supply fuelled by mortgages on an unprecedented scale. Credit was ludicrously easy. Northern Rock were allowed a loan to deposit ratio of over 300%!! You were allowed to put a tiny deposit down (5%) and take a loan of 125% of the property value and to cap it off I remember self certified mortgages for the self employed where individuals did their own credit check !! Reckless lending like this was prevalent across most banks as we eventually found out..so really Danny needs to observe his own actions as he was an insider to boom bust on a monumental scale.
BBC R4 discussions this morning more like BT – Britain Today. Only alternative to BoE increasing rates presented as ‘even higher’. Not a mention that some economists query rate rises. No real account of what the rise will do , such as huge bank profits, or dreadful effect on mortgages, rents etc – only in very general terms .
A democracy needs an independent authoritative information source – ours does not have that.
I try
As does Danny Blanchflower
So why arent you or Danny on BBC mainstream news today then? Because they don’t want that discussion – they see their role as conveying the official message , not really asking questions.
I am not a definite as PSR on this but difficult not to be.
I was invited for tomorrow but due to family commitments could not make the time offered
The narrative continued on R4 on the World at One, with an interview with DeAnne Julius. According to her, we’re already in the foothills of a wage-price spiral (I laugh at this when considering my own 3% pay rise, coming after a 20% real-terms fall over the last decade and a half). She thought that BoE’s decision not to raise rates more was potentially dangerous.
Utterly absurd on her part
I agree with all your comments in this post.
The intellectual straight jacket that is monetarism means that the idiots who believe in it have to be seen to be doing something rather than nothing. So, they do the wrong thing if only to be seen as proactive.
But of course, we all know that it’s much worse than that.
Too me, the variable mortgage industry is just a bet taken by mortgage lenders on increasing loan yields but portrayed as ‘choice’ to consumers.
What we are going to see this week is this in action – a way for rentiers to dip into inflationary cycles so that they are not left out of an inflation in their profits.
This system needs be called what it actually is – daylight robbery, a winner takes all policy for lenders. Another transfer of cash from the needy working people to the rich.
I paid off my mortage last year, and now have a daughter at university which is very expensive.
But since 2010, public sector workers like me have had their wages cut by 25%. All the decisions we used to take were predicated on what was happening BEFORE the Tories and that was that our earnings would continue to keep pace with inflation etc. Why? Because we were working, and you’re taught that working will make you prosperous – yeah?
This has proven not to be the case, so we’ve had to reign in plans for work on the house, take fewer holidays, less luxuries and save more. So, we – and many others are circulating less cash in the economy – and as Paul Krugman says, in an economy, everyone’s wages is someone else’s wages.
So, when Truss says that she and her party of numpties don’t ‘do redistribution’ (yet the common refrain is that trickle down IS redistribution!!!!? when they talk of the benefits of bank bonuses they want to take the cap off – or at least used by them to clumsily boost GDP) you know that she and Kwarteng, have not got a clue about what they are doing.
But the worst thing is that this has got ordinary people like me worrying and fretting about money. Yes – I know that if were in Pakistan at the moment I’d have a lot more to worry about.
The common right wing fascist refrain is ‘ well, you should not have had children, or you should have worked harder ‘ etc., etc., but is that right? I don’t think so. Most of the things I’ve been thwarted by have been beyond my control – god knows how many recessions and budget cuts – but I’ve always worked?
But in a society like ours, such worrying takes its toll, and you just end thinking about how much longer we must continue to suffer like this?
The right would not understand that
Economists have got lots of things wrong including the current level of interest rates for which there is little if any justification. But that aside, on the point of who sufffers
1. The top income decile in the U.K. accounts for 33% of mortgages.
2. The top three income deciles account for 66% cumulatively
3. In contrast, the bottom three account for less than 5% cumulatively
The numbers are broadly the same for consumer credit, but slightly less extreme. But the conclusion is the same raising the cost of borrowing does not hit lower income HHs excessively because they are not the ones who borrow.
There concern is that they have little or no savings, having falling real incomes and little cushion to protect them from higher energy prices.
That said, you are correct to argue that raising the cost of borrowing will not affect the drivers if inflation. Bailey has been perfectly honest about that (as has Lagarde)
Thanks
Can you provide your sources
Even if you are right about the distribution of mortgages, I think you are ignoring the effect of Buy To Let mortgages. The lower income households who do not have mortgages will, almost certainly, rent privately. The interest rate inceases will, without doubt, lead to rent increases, which will affect them enormously.
Well said
I wonder if the data was corrected for that?
It may be that lower income households do not borrow from the usual lending sources as their credit worthiness doesn’t qualify them. What does happen though is that they will borrow from riskier sources which will become worse the more desperate people become.
What are the objective reasons for and purposes of a bank rate?
Too big an issue to address here
So BofE says it has no choice but to raise interest rates because if the pound falls the price of oil and gas, paid for in dollars in the international market, goes up.
It seems to me that as far as North Sea gas is concerned, the government could declare a state of emergency, as you suggested in an earlier post, and pay for it at cost + a reasonable profit in pounds. This would solve the problem, at least as far as this fuel is concerned.
Yes
House price inflation has been a problem for a long time in the UK, but I’m afraid the Tories love it and the “feelgood” factor it produces for Tory voters. I think we are up the proverbial creek without a paddle. IR increases will clearly hurt those that went along with the property bubble fantasy of Little Britain. There has always been the likelihood that eventually a shock to the system would happen. We now have that shock.
I read the comments here and I’m pleased that some of you mention the reckless lending of the past, culminating in the abuse and crime of self-certification mortgages. We often forget what has happened in the past, a cleansing so to speak. The saying “it is different this time” springs to mind. I prefer “what goes around, comes around”. It is never different, just different circumstances maybe. We have forgotten again, Johnson’s parting gift to the Tories was talk of 50 year mortgages. Then it will be 100. Where will it end,1000 years? The Tory 1000 year mortgage Reich?
You want to see reckless lending in action?
Mortgage Madness (1-3): BBC2 – 29/10/2003 Some great undercover journalism here.
https://www.youtube.com/watch?v=vT1UnGS91BY
https://www.youtube.com/watch?v=sGbd95Ac1D4
https://www.youtube.com/watch?v=_OAc6JRb3Bg
Do we ever learn?
We don’t
I’ve just moved to a fixed rate having remortgaged to a tracker back in December. Since then the rate has risen now 7 times, each adding to the cost by £20-30.
I am lucky enough to be able to afford this, and had some inheritance to pay some of my mortgage off. Many won’t be able to afford the extra costs.
I feel for people on SVRs, which at least historically, was most mortgages. They are paying more of their income to bankers, for no good reason I can see, other than that the MPC thinks they should be.
It’s presently possible to get a personal loan with a lower interest rate than even the best mortgage rates. I applied for a fix through yesterday, which is at 3.69% with Nationwide. I couldn’t find anything lower than 3.5% with other lenders. 4%+ will now be the norm, adding hundreds a month to many people’s mortgages since last year.
It would make more sense if we hadn’t had a hugely buoyant house market for the past 20 years, where many have taken on huge mortgages that would otherwise have been unaffordable to them with high interest rates.
I don’t see how this can be good for anyone except those with no debt and lots of savings. So, the wealthy then. And possibly the retired who’ve since paid off their mortgage and don’t work for a living anymore.
It’s a house of cards and it’s going to make life very stressful for many middle income earners, as well as many renters. Undoubtedly it will cost the Tories a lot of votes. But how soon until they actually realise that?
See blog just posted
Votes!
Look – the Tories don’t care, because the very pockets they are lining with their cost of living crisis policy will then fund them at the next election to outspend the opposition and win (helped by the opposition’s inability to work together and get out of its own Thatcherite straight jacket).
This is how modern democracy works.
I heard some Scottish Labour numpty this morning on Radio 4 going on about Government borrowing and not once did he say that the Government actually owns the bank it was borrowing from. All it is doing is ramping up angst.
What a bunch of morons our politicians are.
Or, do they all agree that they want break us and the country and sell us all off to the market?
The irony is that JRM does appear to know that the government owns the BofE.
I doubt he worked this out for himself, which suggests he must was told this by someone in the Tory party whose opinion he respects.
This leads me to wonder why this is such a well guarded secret.
Could it be that it allows the Tories to engage in pork barrel politics secure in the knowledge that
(a) the country will not actually go broke
and that
(b) when Labour gets into power it will be to obsessed with “putting the finances in order” to achieve much themselves?
Hi Richard, can you explain whether or not the Bank of England is basically following the US Fed. And if it is why is it doing this. I see reference made (not on your blog) of a problem with the UK’s Balance of Payments which I don’t really understand.
Does that mean that If our trade balance is in the red (so to speak) that we are in yet more difficulty as a country.
Thanks v much for the blog btw I have been reading it now for many many years and it’s always v informative. Les
The aim of the BoE is to follow the Fed to prevent a fall in the pound, which Kwarteng managed all on his own yesterday
That fall will fuel inflation and will pouch rates up again
Are we in trouble? No. It’s much worse than that