Now the Bank of England (BoE) is the central bank of the United Kingdom, founded in 1694, and its mission is promoting the good of the people of Britain by maintaining monetary and financial stability, isn’t it?
Yep, but it would appear to many of us that instead of diligently performing that mission, it is about to embark on action that jeopardises it completely, wouldn’t you say? Well, the powers that be there, led by their overrated (?) leader, Governor Mark Carney, seem intent on increasing Bank rate from where it has been for the past year at the ‘emergency level’ of ¼%, back to its previous ½%. Now that may not seem much to those of us not financially literate, but you can be assured that it will have a significant effect on the UK’s economy – and that it could moreover later be disastrous, to boot?
Back in June, the 2 constantly ‘overoptimistic’ hawks amongst the 5 other ‘sensible’ majority dovish policymaking members of the Monetary Policy Committee (MPC), voted to do that very thing and did so AGAIN in the two subsequent votes when there were then 8 and 9 members voting respectively. However, last month Carney in his routine press conference disgracefully indicated that the Bank was preparing to reduce stimulus and a rate hike was likely in less than a couple of weeks’ time from now. Well, if you are not sure about that, you had better believe it, because the financial markets certainly do, as shown by an immediate surge in the pound sterling to a twelve-month high, no less?
This comes about because’ inflation’ [that means the cost of living] has been rising, driven by the weakness of the pound, as Carney says? (or more likely oil?). Yes, the consumer price inflation level reached 3% this month (up by over a seventh in just three months, and is now the highest in 5 years), and Carney believes it hasn’t peaked yet! So what?
It is more than likely that, even without action, inflation will simply fall back when factors stabilise, isn’t it? That is because wages are NOT tracking inflation upwards and employment levels remain high. Also, overheating the economy at this time may not be such a bad thing in light of other negative factors that it faces in the future.
Now, that inflation figure rise has to be seen in relation to the ‘target’ set by the Government of just 2%, and when the Bank fails to control the Country’s finances to within 1 percentage point of that amount (up or down) the Governor has to write to the Chancellor to explain himself, eh?
Well, it is looking bad regarding next month’s figures as well, and if so it will require a bit of letter writing by Carney and since the only power the Bank now has, is to alter the Bank rate, it is on the cards that an increase will actually happen. Indeed, some financial pundits (like say the Sunday Times’) say “Stop the dithering and raise interest rates” – that exhortation seemingly is just to avoid upsetting the players in the financial markets who feel they were misled and were planning to make a killing on their gamble on that increase actually happening, rather than offering some sound advice on what is best for the Country, don’t you think?
Now, you may well wonder, as just an ordinary member of Joe Public, why YOU should give a damn about the machinations of Bank rate, as you aren’t amongst the financial Wizz kids or market wizards of the UK or overseas, perhaps? Well, it most certainly DOES concern us ALL because Bank rate impacts most of our lives, not least because it is the basis for so much more that goes on in them, doesn’t it?
For a start an increase in interest rate, while it tends to reduce inflationary pressures (so it will drop), it also tends to moderate downwards economic growth, and increases the cost of borrowing (which equally applies of course to government debt), reduces disposable income, and puts a break on consumer spending.
When the cost of borrowing goes up inward investment gets reduced. Mortgage outgoings and cost of bank and credit loans goes UP of course, as do savings’ incentive [due to improved returns – including that inbound from overseas (hot money)], and all that leads to reduced consumption, as well as a fall in house prices. Personal debt is likely to increase as banks, credit card, and other lenders are willing to lend even more (greater returns). Oh yes, the pound will go up (so your overseas holidays will be cheaper), BUT imports will rise while exports will drop.
Therein lies the policy dilemma facing the BoE – to halt the surge in inflation but suffer a slowdown in the economy, dwindling consumer spending and declining inward investment, eh?
Many of us don’t think it is at all sensible to start raising interest rates, and whilst in June the MPC’s vote was 2-5 against it seemed most likely, but now it is 2-7 against, it would seem LESS likely, surely? Some strong advice to Governor Carney then – bloody well stop signaling and hinting what the MPC in future MIGHT do about raising Bank rate. ALL you are doing is pissing EVERYBODY off by your guesses, eh?
Just to explain briefly then why the MPC is likely to stick with the current rate. Increasing Bank rate DOESN’T have an ‘immediate’ impact on inflation – it is much more sluggish than that, isn’t it? Also, longstanding policy is to only tinker with the rate if the combined ‘judgement’ is that inflation is going to be too high downstream – say in a year or two? Furthermore, other risk factors affecting the economy HAVE to be taken into account, don’t they? Those of us who have had direct past experience of risk management, will know that you establish what factors are involved, what is the likelihood of an event, and most importantly what are the consequences IF that event occurs – then the RISK to be taken into consideration is simply the factor of those two multiplied together.
Well, even us laypeople KNOW that a factor affecting the UK economy that has ‘definitely’ to be taken into account is the outcome of BREXIT, don’t we? Now, it may well have been considered previously that the risk of a bad outcome was LOW, but nevertheless the consequences of that result would be extremely HIGH, surely? However, things have got even worse as life has moved-on somewhat now, and negotiations with the EU are in a dire shape, so the risk of a bad outcome (without a smooth transition, particularly regarding stabilised trading arrangement) has itself risen to HIGH also. With BOTH elements now HIGH, it MUST be concluded that the risk to the UK economy is significant and potentially catastrophic, surely?
Indeed, regarding BREXIT, it is increasingly likely that Britain will either get a “No Deal” outcome (so the Government is now preparing for exactly that!), or it will cost the Country a king’s ransom – either way, the effect on the economy is likely to be severe, don’t you think?
Now, that is why a responsible MPC needs to do everything in its power to protect it beforehand and should not just walk away from raising Bank rate before BREXIT is achieved [JUST 17 MONTHS AWAY!], and its impact absorbed, but should run for the bloody hills, shouldn’t it? If things go badly and the economy does go down the toilet, there is virtually nothing that the Bank will be able to do about it, so the resulting recession will be a long and crucifyingly painful one, won’t it?
What the Government and the bank of England SHOULD be doing is putting the brakes on the seriously increasing household debt, which is currently a big threat to the economy’s future, not by raising interest rates (which can cause defaults & arrears, especially with ‘most’ mortgages being on the top variable-rate), but by allowing inflation to increase, which effectually reduces the ‘real’ value of household debt.
Then of course it should lower housing demand and expand supply by scrapping the Governments ridiculous ‘Help to Buy’ scheme [which not only has pushed-up house prices but has been hijacked by the rich & privileged wealthy – it simply allows them to buy more expensive properties while developers make a killing [as there is no cap on income for applicants, and these beneficial loans are available also to existing homeowners] – indeed their incomes average well over £40thousand , but with the money build ordinary Council houses, as that being the only realistic or proven way of getting ‘affordable housing’ availability.
There is also the need for getting shot of (that is DON’T renew in January) the Funding for Lending arrangement that allows banks to obtain money for loans cheaply from the wholesale financial markets/BoE, which means of course that banks and building societies don’t have to move their arses at all to attract savings from the general public (thereby, due to minimalistic interest rates, that reduces ANY incentive to save, to the extent that people don’t bother anymore, and instead just acquire debt when needs must).
Furthermore, the BoE needs to put up effective hurdles to ALL lending and credit to the general public, which is currently dished-out like a never-ending supply of sweets – there should be absolutely strict high ‘affordability’ checks before debt CAN be acquired by ANY household, surely? [At the present time if Bank rate was at a desirable level of around say 2%, it would mean that household debt at the current level would be utterly unsustainable – so it HAS to be brought down, then interest rates can go up later and return to normality, doesn’t it?
The Bank of England being set of a ‘target’ level of inflation has just encouraged nutcases to get hot under the collar about it being missed, when it is something that is pretty meaningless on the scale of things, surely?
[The Government Chancellor ‘Philip Hammond’, can solve the futile inflation debate crisis at a stroke overnight – by just resetting Bank of England Governor Mark Carney’s inflation target to be 4%, eh?]