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The politics of interest rates

14 May 2014

The Bank of England’s inflation report will be published later this morning, which will reveal how strong the bank believes the recovery to be. All eyes will be on its estimate of the remaining ‘slack’ in the economy, which will govern policy on interest rates. The bank’s Monetary Policy Committee has already said that the bank may have to raise rates earlier than expected if strong growth is creating inflationary pressure. City analysts appear to be working on the basis that rates will increase in the first quarter of next year; but there are rumours that the decision might have to be brought forward to the last quarter of this year, such is the speed of growth.

There was a time when it was assumed that interest rates would not rise before the general election, so there has been little consideration, at least on Fleet Street, of how such a decision might be sold to the public in the prelude to an election. The obvious route to take is that an increase in interest rates is a reflection of Britain’s renewed economic strength; it is an endorsement of long-term government policy and the recovery, as well as being a blessed relief for beleaguered savers and pensioners (who are, of course, likely to vote). But such an endorsement does not mean that the recovery is secure. The bank is adamant that any rise in rates will be modest and gradual; the bank forecasts that inflation will remain around the 2 per cent benchmark for a couple of years, through a period of what the OECD describes as ‘above-trend’ growth. This approach to interest rates allows George Osborne to have his cake and eat it.

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A more competent opposition, with confidence in its own thinking, might attack Osborne over interest rates, arguing that the lack of room for manoeuvre is evidence of Britain’s inherent vulnerability: proof that the recovery is volatile and that the economy will not return to ‘situation normal’ under Conservative stewardship. It is, of course, extraordinary to keep interest rates rooted to the floor. And that is not the only radical economic instrument that Osborne has deployed. The pension reforms at the last Budget, although welcome in many respects, were further proof of SNAFU and fiscal weakness. As Fraser put it on Budget day, ‘Osborne is, quite literally, banking on a pensioner spending splurge’. On the basis of Osborne’s policies, one might say that the British economic system cannot support the British people.

Instead, the opposition has chosen to make a tactical play on house prices; the FT quotes Ed Balls calling for action on Help to Buy. Property prices in London and the south east are, perhaps, out of control; but, once they are stripped out of the national figures, the rate of increase in England and Wales is around the 5-6% mark. How many voters are going to object to that? Any decision on restricting mortgage lending will be taken by the Bank of England’s Financial Policy Committee and is likely to be modest in scope, which is a fact that doesn’t lend itself to grand headlines and game-changing tactical operations in Westminster. Every day in every way, Ed Miliband’s position on the economy is getting weaker.

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  • Iain Hill

    Someone will need to explain to banks that depositors (like the old) put money in expecting a return on it. Or will it need legislation before they will pay?

    I am retired with quite substantial bank deposits. I estimate the loss of interest to me personally in terms of lost interest is about £50K over 5 years. All the parties know of this situation, and quite simply, no one cares. Imagine MPs taking a cash hit of £10K per annum

    Unfortunately, I only have one vote to withhold, as I would like to not vote 100 times for these useless parties. My one consolation is that £20K of the loss would have been suffered by the Treasury!

  • Makroon

    Blackburn was answered in the inflation report, by Carney pointing out that after the last big financial crisis (the 1930s), interest rates stayed low for decades, why are so many commentators obsessed with “getting rates back to above 5%” ?.
    If Labour try to talk about “the unstable economy” (whatever that might be), they will just draw attention back to who created this damage.
    Again, Paul Johnson was spot-on with his trenchant criticism of the tax mess, which Osborne has studiously ignored. But this just begs the question of why the IFS was quiet and unprotesting while BrownBalls were creating this whole mess.

  • Mike Barnes

    The very notion of raising rates when unemployment is at 6.8%. Has the world gone mental?

    Pop the London house bubble with a mansion tax, or banning foreign buyers, or changing mortgage rules. Problem solved, then you can actually let the whole economy recover before raising rates. North east unemployment actually rose to 10.1% today. So a rate rise is effectively writing off places like that.

    • Iain Hill

      Set different, appropriate rates for each purpose. It is called government!

  • MirthaTidville

    The Cameroons decided they would court popularity, as they have done before and since, via property owners. They introduced the disasterous `Funding for lending `whereby ordinary savers were forced, in effect, to subsidise mortgages. Quelle suprise, property prices shot up..What they hadnt been bright enough to realise is how many elderly there were who were tipped into the benefits trap, from which they will never escape,as a result of artificially low savings rates. They also hadnt reckoned on how much money was pumped back into the economy by savers.

    It was Margaret Thatcher who famously said`You can`t buck the markets`….what a pity they didnt listen to her

    • 2trueblue

      Then how do you explain the massive house price rise during the Liebore reign? They had no handle on the housing problems and made it worse with massive immigration and a real dip over 13yrs in building council houses.
      The Bank of England set the interest rates.
      Blairs family became multiple house owners!

      • MirthaTidville

        What you need it explaining that labour hosed money round like it was going out of fashion and relaxed lending rules.Think Northern Rock`s 105% mortgages. That was then..move on and the Tories never learnt from it, they just did it differently and clobbered the savers

    • Iain Hill

      Just wait till 2015. I wish I had votes in 100 constituencies, but we are legion, and we will vote, unlike many of the mortgage payers who have been subsidised by us

  • you_kid

    Let’s put this plainly for the Piketty on speed dial types: r>g
    The growth of extant capital (r) is greater than the rate of economic growth (g).

    Now,the Magna Carta elite have socialised their losses via QE, then they raised their hard asset values by 20% since 2013 in the capital city only, only to now demand higher interest rates on their ‘investments’? Begone, thieves!

    The British people (in particular the next generation) are mugs – they just don’t get how they are mugged and then mugged again and then mugged again and again and again. Endlessly mugged and no one appears to care.
    “Give us your money or we will just print more or revalue OUR assets only, never yours”, say the Magna Carta Socialists who have long run out of their own cash.

    • Makroon

      Do you have an English version of that ?

  • HookesLaw

    ‘Mark Carney said he thought that the Bank’s policymakers saw a real prospect of the economy moving from a consumer-led recovery to an “expansion sustained by business investment”.
    Delivering his inflation report, the Canadian economist said that inflation was a full percentage point lower than had been expected last summer and growth was back to pre-crisis levels.’

    Anyone for letting Labour back in to wreck all this?
    How thick do people have to be?

  • HookesLaw

    9 out of 10 new jobs going to British people according to the latest employment figures.

  • HookesLaw

    Some people seemed to sneer at the motives of the govt in trying to collect tax from celebrities but its now revealed that
    ‘A host of celebrities, bankers, sports stars and other luminaries used the
    same massive tax-avoidance scheme as the musician Gary Barlow in an attempt
    to shelter £336 million from the taxman’
    (Times) — and this is just one scheme. Who can deny that if this is allowed to persist then taxes would have to be higher than they need to be?

    Its this govt under a tory chancellor which discovered these scams which were permitted by Labour. Just another reason to refute all this liblabcon rubbish.

    • Mynydd

      It’s HMRC that found these scams.

    • Iain Hill

      Simply STOP all the schemes. You earn it, you pay 40-50%. You don’t pay, you will be prosecuted like all the poor benefit claimants who fiddle £20.

  • PT

    Whilst house price growth in the regions may remain subdued at 5-6%, the majority of the population and the majority of property is in London and SE and they’re seeing double digit rises. It’s plain dumb to strip out the largest part of the market and say house price growth is modest.

    Regional house prices growth will soon enjoy double digit gains anyway. History shows they always play catchup as the ‘ripple’ effect takes hold.

    • HookesLaw

      Why should the rest of the nation suffer for house price growth in a one region and a specifice section of that region. Let the london bubble burst.

      • 2trueblue

        Any time now it will.

  • roger

    Britains are still hugely indebted and a rate rise will definitely hit many hard, snuffing out the general weak growth, just in time for Labour to be faced with how to really dig us out of the hole, the debt trap.

    • 2trueblue

      A large number of those on cheap mortgages have in fact paid back more than they would otherwise have done, so some are prepared for the rate rise. Those who have paid the price are savers.

  • Mynydd

    There will be no interest rise before the election, Mr Cameron/Osborne will not allow it. I say this because the Bank of England is no longer independent, it is now is political animal. The new governor said the rate would increase when the unemployment fell below 7%, when that happened (today’s figure is 6.8%) there was a change of criteria, to that in line with Mr Cameron/Osborne’s policy.

    • Julian Stephenson

      “The new governor said the rate would increase when the unemployment fell below 7%” Can you reference the governor saying that? I thought he said interests rate rises would be considered at that point which is not the same thing.

    • HookesLaw

      On the contrary – the govt can do nothing to stop interest rate rises. And indeed a modest increase in rates acting as a reminder and a warning and a suggestion that the govt is in control would not harm its election prospects. Even you know that interest rates are going to rise over the next 18 months which suggests to me that the electorate are not totally thick.

      • Mynydd

        ‘interest rates are going to rise over the next 18 months’, that infers after the next general election, just as I said

  • alabenn

    Miliband does not have a position on the economy.
    He has, a see an opportunity to obfuscate, deny and decry any sign of things going right, this only works when things are as bad as the situation they left the country in.
    They have nothing of any substance to say, never have, never will.

  • Rhoda Klapp8

    No, you don’t understand. The MPC sets the rate entirely independently of political interference.

    See how I kept a straight face there?

    • Tony_E

      That will be proven or dis-proven by the timing of interest rate rises. Cui Bono.

      • Iain Hill

        Is he responsible for monetary policy now as well?

    • Count Dooku

      I think King was always independent of HMT, we will see about Carney.

      This is a tricky balance though because while the housing market may be booming, the productive sectors are yet to fully recover. Interest rates affect the whole economy, not just housing.

      I think Carney should call for HTB to be scrapped, or at least the scrapping of phase two. He should also increase capital requirements for mortgages. This will push up rates for those looking to buy houses but should still leave policy loose for the rest of the economy.

      • HookesLaw

        Carney has his reputation to think about and has no upside in ruining it to pander to a politician. And its the MPC who decide.

        Eddie George is lucky that his reputation is not more tarnished after allowing Brown to strip powers from the Bank of England. Brown did not give independence to the Bank of England – he neutered it. George thought about resigning and he would have done the nation a service if he had done.
        This govt have given bank regulation powers back to the governor.

        • the viceroy’s gin

          “Carney has his reputation to think abou…”


          Bwa ha ha ha ha ha ha ha ha…. ha ha… ha… whoo, I better get ahold of my self it’s just that it’s rare to read something so unintentionally hilarious… like one of these hacks would actually be concerned about something besides money and BWA ha ha ha ha ha ha ha ha ha …

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