It may be counter-intuitive but small rise in rates could help growth, not damage it

Danger of inflation spiral now hurting consumer confidence

Worrying about borrowers and bankers has gone too far

by Dr. Ros Altmann

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Failure to start raising rates is a missed opportunity: The decision by the Bank of England to keep interest rates at the ’emergency’ level of 0.5% is yet another missed opportunity to restore confidence in its inflation-fighting credentials. But even more worryingly, by not raising rates, growth could be damaged.

Saga is calling once again on the Bank of England to start raising interest rates as soon as possible. Dr. Ros Altmann, Saga Director-General warns ‘We have reached a point where I believe not raising rates is actually damaging the economy. Contrary to perceived wisdom keeping rates low could damage economic recovery, not help it. Our Surveys show that the over 50s – who are the section of the population with strong spending power – are cutting back. This will harm growth. But they remember the stagflation of past years and how damaging it was. They fear that Bank of England policy is only worried about devaluing borrowers’ debts, or helping banks to be profitable, which is damaging older people’s interests’.

Danger that inflation fears are damaging spending: We have now entered a dangerous phase in our economy, where an inflation spiral that has been created by the policy of ultra low interest rates, is starting to have a negative impact on growth. We can no longer just assume that keeping rates low is only good news for the economy, because high inflation figures, together with these low interest rates, are causing consumers – particularly older people who have seen stagflation before – to retrench.

Reasons for low rates are no longer valid – low rates have boosted inflation: Interest rates were brought down to the record low of 0.5% over 2 years ago, in order to combat what was then thought to be a likely period of ‘deflation’. In the end, however, it has turned out that the policy of low rates and Quantitative Easing has weakened sterling and boosted overseas emerging economies, which has led to rising commodity prices which have in turn caused a surge in UK inflation. But UK inflation has also been boosted by domestic factors such as rising bank and insurance charges.

Inflation not just caused by external factors, but partly home-grown: The sources of inflation are, therefore, not just coming from the outside, but have actually been created internally by domestic policy. Having created inflation – whether it was done intentionally or unintentionally – the interest rates that were suited to fight deflation are no longer appropriate.

Bank of England’s Home Page promises to set rates to keep inflation low and preserve value of money!: The Bank of England’s website home page proudly claims ‘The Bank sets interest rates to keep inflation low to preserve the value of your money’! Tell that to the savers and would-be consumers who have seen their savings so badly damaged by high inflation and low interest rates. If the Bank of England really does want to keep inflation low and preserve the value of people’s money, then interest rates must start to rise now.

Leaving rates so low is no longer necessarily good for growth: Why are rates so low? Partly because borrowers are supposed to need help in being able to afford to repay their debts. Also because banks needed to rebuild their balance sheets. And partly because of fears that fiscal cutbacks will weaken the economy.

Borrowers and banks have had time to adjust, danger that continued low rates will weaken the economy now: As regards borrowers and bankers, surely they have had enough time to adjust to the problems they got into when taking on too much debt before the credit crisis. And as regards fear of harming the economy, I believe that refusing to raise rates even a small amount now, in the face of such an inflation overshoot, is doing the economy more harm than good and could actually weaken growth itself.

Inflation is not temporary and older consumers are retrenching: Yet the Bank of England refuses to budge, supposedly because the inflation we are all suffering so much from is only ‘temporary’. But the evidence suggests that inflation is not just temporary and, if so, then those living on fixed incomes (anyone who has bought a pension annuity or is trying to live on their savings in old age) will find their spending power falling each month. And, given our ageing demographic profile, this itself will weaken the economy. If a growing proportion of the population cuts back on its spending, growth for all of us will suffer.

Saga Survey confirms significant cutbacks: In fact, Saga’s latest Survey results show that the rising cost of living has led to the over 50s cutting back on their spending. More than 60% say they have cut back ‘non-essential’ spending, such as eating out, buying clothes, going to the hairdresser or taking day trips. If those who have money are cutting back, then this damages the economic outlook.

Bank not taking inflation threat seriously and ignoring savers: It seems that the Bank is not taking the inflation threat seriously enough and has totally ignored the realities for older citizens who saved prudently to be able to afford a better lifestyle in retirement. As they are seeing the value of their money whittled away each month and their savings are delivering little return and, as they fear that this will continue because the authorities are trying to punish them and reward borrowers by devaluing their debts, they will keep cutting their spending plans, and this policy of low rates will cause more damage to the economy in the months ahead.