Simon Rose on BBC TV news explaining why interest rates should rise
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.
The Bank of England’s base rate has been languishing at 0.5% for so long that nobody is asking the most basic question of all: “Why?”
The Monetary Policy Committee decision to cut it to 0.5% in March 2009 was because “the February Inflation Report had implied a substantial risk of undershooting the 2% CPI inflation target in the medium term and a further easing in monetary policy was likely to be needed.” Fear of deflation inspired the cut and the accompanying £75 billion of Quantitative Easing.
31 months later, the situation is rather different. CPI inflation is 4.4%, yet bank rate is still 0.5%. The MPC’s inaction over base rates is odd, given that the MPC’s role is explicitly to set an interest rate that it judges will enable the Government’s inflation target of 2% to be met. Mervyn King’s letters of apology to the Chancellor repeatedly claim that inflation will fall in due course, even though the Bank of England, which has a record of consistently underestimating inflation, is forecasting it to go to 5%.
Some commentators believe the MPC is giving prominence to other economic considerations. The Wall Street Journal recently reported that the Bank of England “is no longer targeting inflation. There’s no other way to interpret Governor Mervyn King’s open letter on why inflation remains above the bank’s 2% target…By his own admission, Mr. King (sic!) has said a country’s inflation rate is entirely down to the central bank’s choice. The Bank of England could have met its inflation remit, but only at the expense of driving down the growth rate.” … Continue Reading
A few weeks ago, BBC Radio 4 broadcast a debate about economics. Held at the London School of Economics and chaired by Newsnight’s economics editor Paul Mason, it was about the contrasting views held by the 20th century’s greatest and most influential economists, John Maynard Keynes and Friedrich Hayek.
Pretty dull stuff, you might think. But in these difficult times, a surprising number of people clearly wanted to try to understand the ideas espoused by the two great men and what can be done to get us out of the mess we’re in. Not only was the main lecture room full on the night, but so were two overflow halls. The interest was not confined to those who were able to be present at the debate itself. The Radio 4 broadcast of the debate was heard by a million people and the podcast was one of the BBC’s top five podcasts. So popular was it that the BBC repeated it, picking up another 1.5 million listeners.
The podcast is still available and, unlike most BBC programmes which are only available online for a week, it will be available to download indefinitely. It’s well worth a listen. Although saving does not feature very largely, one of the two economists was definitely rather more a friend of the saver than the other.
However, economics can be made more entertaining still. The amusing but informative video about Hayek and Keynes which we highlighted in July has an equally clever sequel. Given how depressing the economics news has been recently, we thought you might enjoy seeing it.
On 15th August we wrote to the Chancellor of the Exchequer, reminding him how supportive he had been of savers when in opposition. It was George Osborne, after all, who in December 2008, said: “Savers and pensioners are the forgotten victims… They are innocent bystanders and it’s simply not good enough for the Government to walk on by.”
As the situation for savers and those on fixed incomes has worsened considerably since then, we pointed out not only how savers’ capital is being eaten away by the combination of record low interest rates and inflation, but also that savers have to pay income tax, despite losing money. Would it not be fair, we wondered, to suspend income tax on savings interest until we return to a more normal environment of positive real interest rates? … Continue Reading
Following the recent Bank of England quarterly report on inflation, most analysts suggest that it will be 2013 before we can expect base rate to move upwards from its record low of 0.5%. After 30 months at 0.5%, it seems likely that savers face at least another 16 months of misery.
The Bank of England believes that, in the medium term, inflation will move just below the Government’s 2% target. However, for over two years the Bank’s predications have been about as accurate as the Met Office’s long range weather forecasts, consistently underestimating inflation and overestimating growth.
In line with most predictions, even the Bank believes that CPI inflation will touch 5% soon, worsening the negative real interest rates suffered by savers. It really sticks in the throat that the prudent members of society, who want to save for their future or who have to live off the savings they built up, are effectively having their money stolen.
What is truly iniquitous, however, is that savers are not only losing money to the ravages of inflation, but also having to pay tax on their losses in the form of income tax on savings income. How can that possibly be fair? … Continue Reading
One persistent complaint we hear is the way in which banks and building societies manoeuvre unwitting savers into accounts paying significantly below the market rate. Although a few building societies are currently offering over 3% on savings accounts – still below the inflation rate, of course – a recent study by Defaqto found that an extraordinary two-thirds of all accounts offer interest rates below the Bank of England’s record low base rate of 0.5%.
In many cases, savers will have opened accounts that initially paid attractive rates and not noticed that, over time, the account has become steadily less competitive. It is commonplace for accounts to offer appealing introductory rates for a limited period, the bank clearly trusting that many savers will forget, or simply not be aware, that the rate will later tumble. Over half of cash ISAs pay such opening bonus rates. However, it is not only existing accounts offer lamentable rates of interest. Several savings accounts currently being advertised by banks pay as little as 0.05% … Continue Reading
For the 30th month in a row, the Bank of England’s Monetary Policy Committee has kept base rate at the record low of 0.5%. Although tasked with keeping inflation at the Government’s target of 2%, inflation is over double that level and expected to go higher. With the price of so many essentials of everyday life climbing so high, many of us will feel that the real level of inflation is considerably higher than that.
Savers are suffering hugely as inflation eats away at their capital. Base rates have been below CPI inflation for almost three years. In the past year alone, inflation has reduced the buying power of our savings by something like £60 billion. We keep hearing from politicians about the importance of reducing our debt yet, despite talk of “cuts”, it is still increasing. For the Government, inflation is massively convenient, of course, as it eats away at the real value of our national debt – at the expense of savers. … Continue Reading
Although Economics is considered a science, it sometimes appears an inexact one, given the variety of “expert” opinions about how to boost our economy. No wonder President Harry S. Truman once said he wanted a one-armed economist so that he couldn’t say, “On the one hand…on the other”.
It’s rare to encounter anything to do with economics that is both enlightening and amusing. So we were delighted to come across “Fear the Boom and Bust”, a video dramatising in musical form an argument between rival economists John Maynard Keynes and Friedrich von Hayek.
Keynes, who advocated that governments spend their way out of recession, coined the phrase “the paradox of thrift”. He believed that, in hard times, saving was unhelpful and that savers should instead be spending to help boost the economy. Hayek, on the other hand, was more of a free-market man who saw savings as a force for good.
What is particularly impressive about the video, other than the high production values, is how entertainingly the views of the two economists are represented. While Keynes wants to steer markets, Hayek wants to set them free. Of particular relevance to us are Keynes’s views on savings: … Continue Reading
With Government policy sometimes appearing to be devised on the hoof – and abandoned just as quickly if it proves unpopular – you could be forgiven thinking that nobody in charge is looking more than a short time ahead. “Let’s just get through the next choppy bit,” seems to be the attitude, “And if we keep our fingers crossed, everything will probably turn out all right.”
Fortunately, we have the Office for Budget Responsibility, set up last year to provide independent economic forecasts. Its first Fiscal Sustainability Report examines whether UK public finances are sustainable over the long term. It makes for uncomfortable reading.
They use figures from the Office of National Statistics which show that the proportion of the population aged 65 or over will increase from around 17% to roughly 26% in 2061. As a result, the OBR points out, state spending on public health, state pensions and social care will mushroom over the next 50 years. Without a change of policy, they predict that the budget deficit will worsen and put public sector debt on “a continuously rising trajectory as a share of national income. This is clearly unsustainable.” Substantial extra tax increases and spending cuts will be needed within a few years or Britain will be in serious trouble. … Continue Reading
The MPC’s not so happy 15th Birthday
Is Steve Webb leading millions of savers into futile pension schemes?
Treasury Select Committee calls for investigation into mitigating the effects of quantitative easing
The reality of inflation
Why inflation is headed up, not down
Saving Not Easing
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