What’s In A Headline?

According to the FT it was a case of “Pick-up in pay awards forced rate increase”, yet for the Guardian the point was rather “Housing boom forces third rise in rates”. My sympathies here are with the Guardian. Of course it is the case that the Bank of England pointed to the rising level of pay increases as the justification for raising its main interest rate by a quarter point to 4.25 per cent yesterday.

But they would say that, wouldn’t they. The Bank of England Monetary Policy Committee has an inflation target of 2%. Now the last time the Bank was able to stoke inflation up to 2% was in 1998 (it is currently at 1.1%), so there would hardly seem to be any great urgency to raise what are already reasonably tight rates by international standards. Except, of course, for the housing situation.

The continuing increase in private and public indebtedness in the UK does of course pose an important problem, and the danger represented by the so-called ‘wealth impact’ of any hard landing on the property prices front will hardly be the last thing on Mervyn King’s mind right now.

Despite inflation being well below the government’s target, the Bank moved to rein in the rapid growth in borrowing when it pushed up interest rates by 0.25 points to 4.25%.

Industry and the City had been braced for the move and the country’s second and third biggest home loan providers – the Abbey National and the Cheltenham & Gloucester – responded by increasing their variable rates to 6.25%.

The rise will add almost ?17 a month to an ?80,000 interest- only mortgage and almost ?21 a month to someone with a ?100,000 home loan.

Analysts said yesterday’s increase was unlikely to be the last; the City is pencilling in a further rise to 4.5% in August.

The National Consumer Council urged borrowers to “think long and hard” about taking on further debt, but the National Association of Estate Agents said the small increase in rates was unlikely to damage the housing market, where prices are rising at almost 20% a year.

Yesterday’s move came in the wake of figures showing net mortgage lending rose by ?9.34bn in March.
Source: The Guardian

Sir Mervyn is undoubtedly not alone in this concern, Sir Alan over in Washington has also been busy letting everyone know what a potential problem all the public and private debt currently being acquired might represent in a not too distant future.

Meantime Rodrigo Rato is now nicely installed over at the IMF and will doubtless hard at it burning the midnight oil to ready his speech about how Spain was ‘unwise’ not to have acted sooner on *its* housing bubble. Possibly he is secretly praying that the UK also has a hard landing, since that way he will have less explaining to do. Remember, thanks to the Euro, Spain is currently enjoying the ECB 2% rate, which with inflation up around 2.7% means that there is a negative real interest rate of 0.7%. Of course in Spain there is no ‘pick up in pay awards’ to be noted, indeed quite the contrary.

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".