WE knew this was coming. After many years in which we could all safely assume that a rise in base rates was a far-off prospect, most economists are now saying they expect the Bank of England to pull the trigger on Thursday and take interest rates up from 0.25 per cent to 0.50 per cent. It is the smallest possible rise, but even so, if it happens, it will be the first change of direction in monetary policy on interest rates for more than a decade.
The question is whether going ahead with a rise would be the right thing to do, and on that there is no definitive answer – which is why the Monetary Policy Committee is likely to be split on the issue even if there is a rise. There is a perfectly reasonable argument to be put that a rise is necessary because of the negative effects a decade of low interest rates has had on saving and borrowing. What incentive is there anymore to save when the returns are so pathetic? And is it any surprise that consumer debt is booming again, with all the risks of bust that carries?
A small rise in interest rates – provided of course it was passed on by the banks, which is by no means guaranteed – could make a small readjustment to the situation, increasing saving and decreasing our excessive levels of debt. And we certainly cannot go on forever expecting British consumers to keep growth in the economy going by spending lots of money they have borrowed on their credit cards.
However, a rates rise is not a panacea and much of the argument for a rise is based on the questionable idea that the British economy and employment are in a relatively good place and that the big problem is inflation. Yes, the rise in inflation, which is largely the result of the vote for Brexit, is bad news for people who have already been struggling with years of stagnant pay, but there would be a price to pay for attempting to tackle above-target inflation with a rates rise, and the price would be paid by small business and millions of ordinary people who are just about managing.
Writing in this newspaper, Mike Dailly, a solicitor with the Govan Law Centre, lays out what he sees as the potential consequences of a rise. Many households are on a financial knife edge, he says, and a base rate rise now would tip them over by pushing up the cost of unsecured credit. The scale of the problem is hard to tell, but Mr Dailly puts the number of people struggling with problem debts at 8.3million.
Mr Dailly makes a strong case, but neither a rates rise nor sticking with the status quo can tackle the real underlying problem in the British economy. Living standards and household incomes have still not recovered from the economic crash of ten years ago, and just when there were the first signs of recovery, along came the vote for Brexit, a fall in the pound and a rise in inflation. The Bank of England will do what it can on Thursday, but the best way to control inflation and encourage growth isn’t tweaking interest rates, it is to provide clarity on Brexit, and only the UK Government can do that.
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