The Bank of England has raised interest rates again to 5%. This means the UK base rate has risen 13 times since November 2021 – which also means that mortgage costs have effectively increased 13 times over the same period.
All this economic garble has been circulating in the media all week. But what does it really mean? To make sense of it all, we need a brief understanding of what interest rates are.
Interest rates are the cost of borrowing and the reward for saving. A high interest rate means you earn more for your savings but, if you have a mortgage or any other loan, repayment costs will be higher.
Margaret Thatcher, inspired by monetarist economics, believed that the way to control inflation was through interest rate management. This means that if inflation is too high, the answer is to raise the interest rate so that people are deterred from borrowing, will reduce spending and so inflation would decline. Such neoliberal economics is the Bank of England’s justification for the prolonged interest rate rise. The UK inflation target is 2%, yet inflation reached 11.1% in October 2022 and was at the high level of 8.7% in May 2023.
To economists, the interest rate is the magic pill. It is set by bankers, deemed technocratic experts, as opposed to politicians who include some of the most hated people in the country. This all sounds fantastic.
But it isn’t. When people are being suffocated by a cost of living crisis, raising interest rates seems like a poison pill.
For homeowners, mortgage rates have nearly tripled, which means monthly housing costs are higher, making times tougher for people. It also means young people stand as much chance of getting on the housing ladder as milking a ram.
For business owners, mortgage costs on property are higher. Businesses with loans – in other words, nearly every business in existence – will also be emptying their coffers to their lenders. And what does that mean? Prices for you and me, as consumers, will be higher still.
So, hopefully you can see why raising interest rates creates a vicious price spiral. Not only are costs higher for people to pay mortgages on their homes, they’re also higher for businesses which means shop prices will only increase further.
Let me just remind you why interest rates are being hiked: to combat inflation. However, the spirals detailed above show that increasing interest rates will only worsen inflation further. As such, interest rates are a poison pill being administered by a group of unchallengeable experts who consistently hide behind the veil of technocracy.
So, the Bank of England will – for the thirteenth time running – be left with egg on its face. Raising interest rates in unfavourable conditions does not work.
With all that cleared up, it’s time to discuss the cause of inflation. Why is it that we’re in such a mess? This question can be answered in one word. Brexit.
People blame free market economics for the cost-of-living crisis. This is simply untrue. The reason why the UK is suffering much more than other European countries is because we are no longer part of the EU single market. In other words, we are suffering because we’ve gone all nationalist – we’re suffering because we’ve abandoned the EU’s relatively free market.
As a result, inflation costs are being driven up because UK businesses are no longer competitive. We lack links to the EU’s colossal market and materials imported from the EU are being slapped with post-Brexit import tariffs. The pound slumped after the Brexit vote and has largely failed to return, therefore increasing import prices further.
Regardless, you cannot think of Brexit in isolation. Surviving independently wouldn’t be an issue if the UK was a mass manufacturer of more goods and services than you can shake a stick at. But it isn’t. We don’t produce anything anymore. The only thing the UK competitively produces worldwide is financial services – only that won’t put food on the table or clothes on your family.
The UK is a net importer. And, with Brexit, the cost of importing goods has risen dramatically. That’s without even considering the current context of a war, climate change and growing populist tension.
So, inflation has been made worse by Brexit, rather than free market economics. And yet it is free market solutions that the Bank of England is deploying to curb inflation by raising interest rates. This is like giving someone a bunch of flowers because they’ve got hay fever. It’s just going to make it all worse.
Image: acediscovery
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