ALEX BRUMMER: Retailers fear rate rise shock could lead to a miserable Christmas
The result of this week’s Bank of England Monetary Policy Committee meeting is on a knife edge. After ten years of super-low interest rates, the Bank’s governor Mark Carney has hinted strongly of a change in direction.
A leading retailer warned me this week that an increase in rates from 0.25 per cent to 0.5 per cent tomorrow may only have limited effect on credit conditions but could have huge psychological impact.
Consumers have become acclimatised to extraordinary low rates, and a rise – and the likely response from mortgage lenders – could be profoundly shocking.?
Indeed, it could cause people to halt spending in the run-up to Christmas, the most vital weeks of the year for the High Street.
An interest rate rise could cause people to halt spending in the run-up to Christmas, the most vital weeks of the year for the High Street
The MPC has been divided for several months. It will require a shift by bank insiders including Carney, deputy governor Ben Broadbent and chief economist Andy Haldane to spur a rate rise.?
Two other deputy governors, the former Treasury mandarins Sir Jon Cunliffe and Sir Dave Ramsden, have made no secret of their reservations.
The Bank has said it aims to ignore the current burst of inflation largely attributed to the fall in the pound after the Brexit vote.
But with the unemployment rate standing at 4.3 per cent of the workforce it may be time to begin normalising interest rates even though there is no obvious upward pressure on wage settlements.
If there are reservations about a rate rise they relate to the softening of the economy this year, despite a pick-up in the third quarter due to the strength of services and manufacturing.?
The Bank could argue it is only taking back the quarter of a percentage point cut in rates to 0.25 per cent which it provided after the June 2016 referendum.
But there are dangers in acting now at a time when there are signs that growth may be softening and uncertainty surrounding Brexit talks may be nibbling away at business and consumer confidence.
Among those most likely to feel the tremors are the 2.6m people who have taken out a mortgage in the last decade and never experienced a rate increase.
Telling them that just a few decades ago home owners were paying 13 per cent or more mortgage rates will provide little comfort. That is ancient history. The change in direction is what will really hit home.
The forecaster NIESR warns of seven rises in the next two years, lifting bank rate to 2 per cent. A rise may be the right thing for the MPC to do given an inflation rate, which could spike to 3.2 per cent. But it will put the frighteners on consumer confidence.
Philip Hammond has moved to top up government coffers ahead of this month’s budget by going ahead with the sale of ￡3.7billion of securitised student loans.
The auction to City institutions is the first tranche of a ￡12billion programme unveiled by the Government in April but put on hold by the general election.
It was expected that the Tories might place the whole scheme on the back burner after student loans topped the agenda during the election campaign when Jeremy Corbyn flirted with forgiveness.?
Since then the Government has buckled to political pressure and set up a review to see if some relief in the shape of lower interest rates or higher income thresholds for repayment might help.
Loans currently being packaged up and sold on became eligible for repayment between 2002 and 2006 so are unaffected by the review.?
Fears that the loans will end up in the hands of unscrupulous City sharks should be alleviated by the fact that collections will be made by HMRC and the Student Loans Company. That is unlikely to stop critics shouting foul from the rooftops.
Labour plans to foist rail and water nationalisation bonds on the financial community in government. So it might be best advised to keep its powder dry rather than alienating future investors.
A disturbing aspect of the response of the banks to the financial crisis is how little ethics and behaviour changed.
The efforts by Lloyds to gag and cover-up the impact of fraud on small businesses that were customers at the former HBOS Reading branch is a case in point, as we report today.
No wonder Gordon Brown, who saved the banks, is in such high dudgeon.
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