Sunday, 2 December 2007

The media campaign to cut interest rates

This Sunday, one could be forgiven for thinking that there is a concerted media campaign underway to push the Bank of England into reducing interest rates. We will pick through a couple of these articles and point out some of the erroneous thinking has infested the media recently.

A cut in interest rates is the last thing the UK needs right now. Inflation is way too high; households need to reduce consumption and start savings in order to work off all that recently accumulated personal debt; while house prices need to come down in order to burst a highly damaging speculative bubble.

However, Britain's newspapers have a different view......

Exhibt 1 - Daily Express - 100 DAYS TO HALT HOUSING CRASH

The Express offered the most hysterical headline, claiming that "Britain has just 100 days to avoid a catastrophic fall in house prices, with effects that will last for years."

Unfortunately, the Express has this the wrong way round. Rising house prices has been a catastrophe. A generation of young first time buyers have been prevented from owning homes; it has ensnared an army of amateur property speculators into making foolish investments, and created the highest level of household indebtedness this country has ever seen.

All these developments lead inevitably towards an an unavoidable and necessary house price correction. And yes, it would be great if that correction could start in the next "100 days".

Exhibit 2 - The Times - Rate cut urged to end the gloom

The Times tells us that "Pressure is growing on the Bank of England to cut interest rates this week as gloom over the economy intensifies. " The "urge" is coming from "Two of Britain’s best-known economists" - Patrick Minford and Tim Congdon, who insist that the Bank of England's monetary policy committee should "slash rates to get the banking system working and head off a sharp downturn." Further into the article we read "The pressure for a rate cut comes as UK retailers face a crucial test of the strength of consumer demand in the run-up to Christmas. "

The Times demand for lower rates is motivated by two concerns: the need to save the banking system, and keep people spending (in order to prevent a sharp downturn).

Again, this is self-serving vested interests being passed off as serious analysis. The Times wants a cut in order to bail out banks who made poor lending decisions and now want to pass the consequences of these decisions onto the rest of us. The Times also wants to keep households spending, despite the fact that many households are at the margins of bankruptcy.

Exhibit 3 - The Times (again) - Get set for the big mortgage freeze

The Times also stepped up to defend in the interests of recent home buyers; "Hundreds of thousands of borrowers coming to the end of cheap two-year mortgages are being warned they could be frozen out of top new deals as the credit crisis worsens." The implication here is clear - if only the Bank of England could cut rates, these borrowers could refinance their mortgages and enjoy further low interest mortgages. Well, what about the millions of savers who would see the returns on their investments fall on account of an interest rate cut?

Exhibit 4 - The Guardian - One in three mortgage holders 'will suffer financially'

The suffering brought on by a 5.75 percent interest rates - where will it end? The Guardian claims that one in three mortgage holders will be hit; "5.5 million of the UK's 16.5 million borrowers could struggle to get a new loan, or face higher repayments when their current deal came to an end and they tried to remortgage."

Let me counter this argument with another statistic; 60 million UK citizens will find it a struggle to deal with higher inflation, and face lower living standards as the current period of rising prices is extended further due to irresponsible interest rate cuts designed to protect banks and wealthy homeowners.

Exhibit 5 - The Independent - 27.9%: is this the shape of cards to come?

The Independent offers a more imaginative variation on the theme that "we need lower interest rates". It tries to spook us with the spectre of higher interest rates on credit cards. "A clear sign has emerged that card borrowers – and particularly those who do not have a top-notch credit record – face having to pay higher rates of interest. Last week, the Halifax launched its Classic Visa product charging a whopping 27.9 per cent."

I congratulate the Halifax for introducing a credit card offering a punitive interest rate. This is a responsible banking, telling its customers that they will be nailed if they run up a credit balance on their plastic. A 28 percent interest rate says "pay that monthly balance off in full or else". So, well done Halifax, I like the cut of your jib.

Higher interest rates on credit cards are a cause for celebration. It will discourage excessive consumption, and encourage much-needed personal savings. UK households need to work off all that debt, and higher interest rates help get incentives working in the right direction.

What will the Bank of England do?

The Bank of England's MPC will cut rates. The Bank may have gained their so-called "independence" from the government, but it remains enslaved to the City of London. Right now, banks need lower interest rates, and if that is what they want, the MPC will deliver. As for the rest of us, we will get more inflation, leading inevitably to stagflation. In the long run, the price of these upcoming rate cuts will be very high indeed.


Inflation buster said...

It is a conspiracy

Anonymous said...

I does not matter what they do in the UK or here in America the housing bubble has hit the Iceberg

Alice move to America we need more people based in reality here

Mr Titanic Methuen Ma

Anonymous said...

It's a bankers world and the housing bubble will continue to inflate for just as long as the bankers can profit from that situation. Banks never lose out, as we've seen with the bail out of the Northern Rock. The government could not find money to bail out Rover UK, another private sector company, but they found billions to throw at a private sector bank.

The bankers inflate and crash, inflate and crash. By this method they redistribute wealth away form the working and middle classes and towards themselves. Those insisting a crash is imminent don't understand how the financial markets are rigged.

If you're stuck in renting, the trick is to adjust your life so you can claim housing benefit, get the bankers (ie the government) to pay your rent and put your real money into tangible assets that they can't confiscate, debt free assets like gold, land, oil stocks.