AS I SEE IT: TERRY MURDEN asks whether hiking the cost of borrowing is doing more harm than good
After eleven consecutive monthly increases the Bank of England may be preparing to apply the brakes on its aggressive interest rate policy. Mind you, there were similar expectations until this week’s surprise upturn in inflation which showed the dragon of rising prices is yet to be tamed. The other big question is whether hiking the cost of borrowing is actually the best medicine, or whether it is merely adding to the cost of doing business.
There are numerous doubters, including myself, who believe that while raising rates may be a cure for inflation in some circumstances, it may also make it worse when other forces are at work.
Bank of England governor Andrew Bailey wants businesses to help bring it down by taking a restrained approach to pricing their goods and products. Faced with higher borrowing costs and the imminent withdrawal of support for energy bills, many business managers will say they have few other choices, or else see their already tight margins disappear altogether.
Higher interest rates are understandable when consumer spending is out of control; when shoppers are piling more debt on to their credit cards and house prices are booming. This is not the currently the case. Retailers are under the cosh, house prices may be holding up in Scotland, but across the UK prices growth has slowed. The effect of raising rates is helping to push up prices and is forcing more people to reach for their credit cards as they struggle to pay their bills, thereby creating a vicious circle.
Scottish property manager David Alexander argues that the series of rate rises are “doing more harm than good” and Jonathan Moyes, head of Investment research at Wealth Club, says we may soon discover “the cure is worse than the disease”.
Furthermore, the cause of inflation – as Mr Bailey himself acknowledges – is the surge in energy prices and the interruption in food supplies and raw materials, which are a result of the Ukraine conflict. Just how an increase in monthly mortgage payments will materially affect any of these is hard to fathom.
David Bharier, head of research at the British Chambers of Commerce, acknowledges that inflation is hurting SMEs in particular, but adds that an interest rate rise alone is a “blunt instrument that doesn’t address some of the fundamental causes of inflation such as failure in the energy market and global supply chain shocks”. He argues that the only way out of this vicious cycle is through taking action to boost economic growth, through investment in infrastructure, skills, and global trade.
The governor says the good news is that inflation will fall by the end of the year, though even here his figure of 4% is out of kilter with the Office for Budget Responsibility which says it will be down to 2.9%.
Is this expected fall a result of the interest rate policy, or because of those external factors that are largely beyond the Bank’s control? Rises in interest rates do not begin to take effect for up to 18 months, and by the time the earliest of this series comes into effect the price of energy and food will already be falling.
According to official statistics and the Bank of England’s own survey data, pipeline price pressures have continued to slow and wages growth has eased. Gas futures prices this year and next are about a third lower than the Bank of England was assuming as recently as February.
There has to be reason to believe that part of the reason for this week’s rise was not only the uptick in inflation but the decision by the US Federal Reserve to raise its interest rate. Should the Bank have kept the UK base rate on hold the pound would have fallen.
Mr Bailey told us last autumn that the UK was heading into a prolonged recession. He now says there will be no recession. Why should we be assured by his comments on interest rate policy and inflation? The Bank’s job is to keep inflation at 2%. Its track record is one of regular failure to hit this target, but few seem to question why it is allowed to keep making excuses for doing so.
Terry Murden held senior positions at The Sunday Times, The Scotsman, Scotland on Sunday and The Northern Echo and is now editor of Daily Business