Interest rates, inflation: Tories, Bank of England in focus

So the finding of a survey from law firm Addleshaw Goddard and the University of Strathclyde’s Fraser of Allander Institute that so many now think enough is enough is eye-catching.

That said, it should be no surprise. Many experts, including former Bank of England Monetary Policy Committee member Danny Blanchflower have for some time now been making strong arguments in calling for rate rises to be halted.

Interestingly, the Addleshaw Goddard and Fraser of Allander survey was conducted before the latest quarter-point rise in UK base rates, to 5.25%, was announced on August 3.

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Asked whether they thought the Bank of England “should continue to increase interest rates this year to bring down inflation”, 46.7% of survey respondents said “no”. Meanwhile, 20.5% said “yes”, 18% declared they were “unsure” and 14.8% responded “not applicable”.

The key thing to do here in interpreting these figures is to compare the 46.7% with the 20.5%. That signals strong opposition to further rises in interest rates.

The Bank of England began raising base rates from a record low of 0.1% in December 2021.

True, UK inflation, which the Old Lady of Threadneedle Street is targeted with keeping at 2%, is embarrassingly high not only in absolute terms but also relative to other major developed countries.

Annual UK consumer prices index inflation dipped from 7.9% in June to 6.8% in July, data published by the Office for National Statistics on Wednesday showed. Annual inflation in the US in July was 3.2%. In the eurozone, annual inflation was 5.3%.

Of course, the UK has some very peculiar problems. “Peculiar” applies in two meanings of the word here. The UK has particular woes caused by Brexit. And it of course finds itself with problems that are odd, in that they are self-induced, in the form of a hard Brexit folly which has fuelled inflation and caused great damage to the economy, businesses and households.

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The UK’s specific Brexit woe is highlighted by Mr Blanchflower, a visiting professor at the University of Glasgow and Bruce V. Rauner ’78 professor of economics at Dartmouth College in the US, as a reason that the UK’s inflation troubles cannot be solved by hiking interest rates.

The former MPC member wrote in The Herald in June: “Sadly, these [Bank of England] rate rises have hardly had any impact at all on inflation - which was caused by supply chain issues after the pandemic, the Ukraine war and Brexit. Brexit and its devastating impact on supply chains, especially for food, is what sets the UK apart from every other country. This can't be fixed by rate rises.”

We are now seeing inflation falling in large part as a result of base-year effects and, as was clear in the latest figures from the ONS, an easing of household energy prices from the excruciating levels to which the Conservatives let them climb.

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Of course, the ruling Conservatives appear to have no problem at all with the approach being followed by the Bank of England when it comes to interest rates.

The Tories have always given the impression they would be more than happy to ramp up unemployment to bring down inflation, and in the UK’s current predicament it has appeared they would be quite content to induce a recession. That impression has been reinforced by the Conservatives’ fiscal policy mix, with Chancellor Jeremy Hunt seemingly oblivious to the importance of growth to tax revenues and resembling Roger Hargreaves’ Mr Mean running a household budget.

Of course, members of the Conservative Cabinet would be unaffected by the rise in unemployment they seem content to oversee.

Those current MPC members keen to move rates ever higher should reflect on the developing effects of the increases they have implemented to date.

An argument has been made by doves on the MPC that the full impact of the rate rises which have already been implemented has yet to be felt, as they have voted against further increases. This seems like a perfectly reasonable and sensible argument.

The scale of rate rises has been great indeed. Not only that but it has followed an extremely long period in which interest rates have been extraordinarily low, and you get the impression that many businesses and households, rightly or wrongly, planned their finances on a very different borrowing costs scenario. That could mean that the programme of rate rises seen already might prove to have been overdone.

The situation appears not to have been helped by Bank of England Governor Andrew Bailey seeming not to accept the views of many experts, and copious research, showing that Brexit has been a major factor in the UK’s peculiar inflation troubles.

Returning to the effects of the surge in interest rates, these are many. Households are dealing with eye-watering increases in mortgage rates as huge numbers of fixed-rate deals come to an end. It takes a while for the effects of such miserable increases to be seen plainly, although there are plenty of signs of the pressure people are coming under if you analyse the housing market data.

In terms of businesses, this week’s Scottish Business Monitor from Addleshaw Goddard and the Fraser of Allander Institute flags one very important effect of the surge in interest rates.

Around 40% of firms surveyed have cancelled or delayed investments - primarily in physical assets - over the past year.

The monitor states: “The most common reasons for these cancellations and delays have been economic uncertainty, affordability, and the cost of borrowing. Half of the firms that have cancelled [or] delayed investments are either unsure when they plan on making these investments or are planning them for 2025 onwards.”

Ken Pattullo, managing partner of insolvency specialist Begbies Traynor, warned this week that a “perfect storm” stemming from the coronavirus impact hit to businesses, debt that had to be taken on, and high interest rates will lead to a “surge in company collapses” in the months ahead.

He said: “Businesses are facing a perfect storm of challenges. As they struggle to recover from the catastrophic impact of the Covid pandemic, they are also now having to find funds to repay bounce back loans during the worst cost of living crisis in living memory.”

Both the Bank of England and UK Government seem a little too oblivious to the real-world effects of their respective policymaking. That is a worry.