Thursday, June 22, 2023
Why interest rate hikes are the wrong answer
As sure as night follows day, yesterday's news that inflation in the UK unexpectedly remained stuck at 8.7% in May is going to provoke yet another hike in interest rates today, possibly as much as 0.5 percentage points, an increase of 11.11%, leaving many people struggling to pay their mortgage, and thousands of families facing the prospect of losing their home.
But we've performed this dance before and still prices remain stubbornly high, and even when inflation does start to slide downwards, there is no way that things will become cheaper, we will have just climbed to yet another plateau, in anticipation of a future rock face appearing in front of us.
And let's face it, everybody knows that 8.7% inflation does not reflect the real cost of living. Food prices in particular continue to soar upwards at more than twice that rate, adding to the difficulties felt by consumers everywhere.
The fact is that the tools traditionally wielded by the Bank of England are no longer working. Is that because they have not been bold enough? Not in my opinion.
But we've performed this dance before and still prices remain stubbornly high, and even when inflation does start to slide downwards, there is no way that things will become cheaper, we will have just climbed to yet another plateau, in anticipation of a future rock face appearing in front of us.
And let's face it, everybody knows that 8.7% inflation does not reflect the real cost of living. Food prices in particular continue to soar upwards at more than twice that rate, adding to the difficulties felt by consumers everywhere.
The fact is that the tools traditionally wielded by the Bank of England are no longer working. Is that because they have not been bold enough? Not in my opinion.
In my view it is because this time inflation is not being fuelled by demand, after all which mortgagees have excess money to spend when already their rent or mortgage payments have increased massively, fuel costs have gone through the roof and putting food on the table is a daily budgetary challenge?
Conversely, the people who do have a bit of extra cash are those with no mortgage and who have savings in the bank, so any rate rise will give them even more to spend. Further interest rate rises are a futile gesture, a bit like King Canute trying to turn back the tide.
It seems to me that the current inflation is being driven by rising costs. These are pressures generated by the impact of the Russian-Ukrainian war, climate change and Brexit.
A lot of our food is imported so red tape, import costs caused by us leaving the EU and a number of other factors have made that activity more expensive. This is then reflected in the price charged, so even if demand for those products is reduced, it is unlikely that this process will be reversed.
So, what the government and the Bank of England are actually doing by raising people's mortgage and rent payments, and by suppressing wage increases, is aggravating the cost of living crisis without actually impacting on underlying inflation rates.
They need to find other tools, such as a free trade agreement with the EU or joining EFTA, leave interest rates alone and let people have pay increases that actually helps them to cope.
Conversely, the people who do have a bit of extra cash are those with no mortgage and who have savings in the bank, so any rate rise will give them even more to spend. Further interest rate rises are a futile gesture, a bit like King Canute trying to turn back the tide.
It seems to me that the current inflation is being driven by rising costs. These are pressures generated by the impact of the Russian-Ukrainian war, climate change and Brexit.
A lot of our food is imported so red tape, import costs caused by us leaving the EU and a number of other factors have made that activity more expensive. This is then reflected in the price charged, so even if demand for those products is reduced, it is unlikely that this process will be reversed.
So, what the government and the Bank of England are actually doing by raising people's mortgage and rent payments, and by suppressing wage increases, is aggravating the cost of living crisis without actually impacting on underlying inflation rates.
They need to find other tools, such as a free trade agreement with the EU or joining EFTA, leave interest rates alone and let people have pay increases that actually helps them to cope.
I don't believe that putting more money into people's pockets will stimulate demand as Ministers claim. That is because, families are going into debt to meet their current financial obligations.
Putting more money in their pockets will mean that they can avoid further debt, while maintaining their expenditure on essential items. How about it UK Government.
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As well as what you say the rate increase gives the banks more money into their shareholders and executive bonuses.They get the rewards, morgagees,renters pay for it.Those getting money out of troubled times are buried beneath the media coverage of the pain others have to endure.
When Enoch Powell first attacked "the enemy within", the Establishment lying to the people, it was not over race, but inflation. He told the trades unions that he was on their side, that inflation was not caused by pay rises for the workers as they had been told by government. Inflation has a different cause now, but the same people are getting the blame.
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