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The Bank of England is killing savers – and the economy
RPI inflation is its highest for 20 years; at 5.6% your money will halve in value in 12 years. CPI has shot up to 5.2%, even though the target rate – ignored by the Bank of England with the complicity of the Chancellor – is 2%. On top of that, we are getting another £75 billion of Quantitative Easing to add to the earlier £200 billion.
The Bank of England is not just failing savers and pensioners; it is failing the country. With no apparent room for manoeuvre on interest rates, the Monetary Policy Committee thinks QE is just the ticket to restore growth to the UK economy. If QE is the answer, why stop at £75 billion? Why not double or quadruple it and really get things humming?
However fancily you dress it up, QE conjures money from thin air to “inject” into the system. The earlier dose of QE did not lead to the hoped-for splurge of bank lending. On the contrary, the banks snaffled the money to rebuild their balance sheets and pay themselves exorbitant bonuses. QE did not spur business investment or improve anything in the “real” economy.
What it did boost was inflation. Even the Bank of England admits that QE has already pushed inflation up by as much as 1.5% and this new tranche will swell it still further. According to one of the Bank’s own leaflets: “It’s the Bank’s job to maintain the value of money by keeping the rate of inflation at a low level.” Yet the more money there is, the less the money that we already own will be worth.
Two years ago, the Bank of England reckoned we would now have 1.5% CPI inflation; instead it is 5.2%. Over the past few years, the Bank has consistently overestimated the UK’s growth prospects and underestimated inflation. Still it persists in claiming that inflation will drop to the Government’s target eventually, but it is surely obvious to everyone that the MPC is wilfully ignoring its statutory obligation to keep inflation to 2%.
Further QE will not only increase inflation but, because it depresses the yields of government stocks, it will undermine pension funds and annuity rates. No wonder the National Association of Pension Funds wants an emergency meeting with the Pensions Regulator.
The Bank of England is playing Russian roulette with the economy. It has not realised that you are only supposed to load one bullet.
Are low interest rates the answer – or the problem?
There is a generally held assumption that low interest rates are essential in the current climate. If the MPC is unconcerned about the inflationary impact of low interest rates, it must believe that they will bring about economic growth. Yet, if that were so, why after almost three years of record low interest rates, is the UK economy not booming?
With consumer spending accounting for two-thirds of our economic activity, confidence is vital to a recovery. With inflation far outstripping pay rises, those in work are feeling progressively poorer and thus more likely to retrench. Those on fixed incomes, like pensioners, are feeling ever poorer and are unlikely to go on a spending binge. With savers so obviously feeling the pinch we can’t expect them to be splashing out heavily either. About the only group happy with low interest rates, apart from a few homeowners with great mortgage deals, are the banks.
Why can’t the Government and the Bank of England comprehend that low interest rates are not boosting demand? On the contrary, low interest rates – and the resultant inflation – are actually depressing demand and delaying any chance of a recovery.
With a pension pot of over £5 million, the Governor of the Bank of England may be well placed to weather the financial storm.
The rest of us aren’t.
We need a chance of policy.
While there’s still time.