The nonsensical increase in interest rate rises continues with the Bank of England sending shock waves across the financial world by increasing interest rates by 0.5% to 5% this week – supposedly in an attempt to curb inflation – and leading to calls for government intervention.
Raising interest rates is in itself inflationary as it increases household expenditure – but mortgage interest rates do not form part of the inflation matrix – how inflation is calculated.
In the past this method of curbing expenditure in the economy may have worked. Now it only penalises those not on fixed rate mortgages – some 1.3 million houseowners. The Bank of England continue to increase interest rates, penalising a small number of individuals unnecessarily and while wondering why the repeated month on month interest rate rises continue to have no impact! The same 1.3 million people have no money left to spend, so increasing interest rates only increases their pain – and makes more money for those in charge of the policy decisions – the Banks.
This will change of course as more fixed rate mortgages come to an end over the course of the next 12 month, perhaps making a difference to inflationary figures.
The real problem with inflation lies in the cost of fuel – driven by the worldwide issues of fuel prices; the cost of food – driven by Brexit and the cost of fuel and wages; the cost of wages largely driven by high employment and a lack of working labour as a result of Brexit, which saw an exodus of 1 million European workers. Brexit has had a significant impact on the UK economy and it is telling that inflation in most western European countries is at 6.1% with interest rates at 4%.
Continued interest rate rises are crippling the housing market, with purchasers finding the mortgage deals difficult and very costly, if they can secure a mortgage deal before it is withdrawn, and with less and less mortgage products on the market. A purchaser’s market pushes house prices down, so a good time to buy if you can. One of the key recession indicators of the past has always been falling house prices.
The constant and repeated interest rate rises leads to less property transactions, as punters wait to see where the cost of lending will play out. The number of sale and purchase transactions this year according to Zoopla analysis will be close to a million – two hundred and fifty thousand less than the norm pre pandemic!
Raising interest rates also cripples business growth of course, with the high cost of borrowing on new on existing loans creating a negative and stifling environment for entrepreneurs and business owners. Banks are now as cautions and slow to lend as they were at the start of the last recession.
The perfect and unnecessary storm then – high fuel and food prices – but still lower than Europe? High employment and no sign of a deal to bring in the labour that the economy needs to grow? Interest rate rises are seen as the simple answer – and they are not of course – this policy is the “Emperor’s new clothes” – a blatant fallacy that penalises the few unnecessarily to the benefit of the Banking world, with UK Banks recording record profits over the course of this year.
UK inflation rates have reduced from 11% this year to 8.7% – great news! Driving up interest rates won’t help and if it does have an impact that will come next year when thousands of fixed rate deals come to an end. Between then and now interest rates will cripple the housing market, stifle economic growth and lead us into recession.
Think back to where we were pre Truss in October 2022 – low interest rates, a buoyant housing market and the economy ready for growth, despite the increasing cost of living. The Bank of England have addressed the stupidity of the Truss regime by showing frugality and adopting a policy of ineffectual interest rate rises which are having a massively negative impact on economic growth. Our inflationary figures are still much in line with other countries in Europe and the world, whereas our economic growth is miles behind. Interest rate rises will only serve to slow the economy and the housing market down and this is a much bigger problem. The government are fixated on inflation when the real issue should be growth and prosperity and how this can be achieved – and this won’t happen without a buoyant hosing market.
Perhaps the government need to intervene and secure interest rates at a rate of 4 – 4.5% for the next six months so that we have stability and certainty and to allow the economy to grow again without this constant and unnecessary interest rate penalties that only work to dampen confidence and entrepreneurial capacity and cripple the housing market.
One Response
The Bank of England raises interest rates to curb inflation?
People spending money doesn’t make prices rise. People borrowing money doesn’t make prices rise. Prices rise when the cost of production increases i.e. staff costs or the cost of raw materials. So the current rates of inflation are driven by one factor – the war in Ukraine. This has impacted the global fuel supply which increases the cost of production, but it has also increased the cost of basic raw ingredients such as flour and sunflower oil. Manufacturing companies have passed these costs on to the consumer which fuels inflation. Companies like Unilever have capitalised on the situation by raising prices and increasing profits. Figures show that Unilever sold less product but charged more and this led to a huge increase in their quarterly profits. This means Unilever benefited from fuelling inflation. Increasing interest rates has no impact on cash rich multinational companies other than banks, but it massively affects the working class. Increased interest rates are a bonus to people with large amounts of savings, but a negative to the younger generation looking to get on the housing ladder. Unfortunately, our brainwashed media seems to adhere to the fact that interest rates are linked to inflation without looking at the bigger picture…….