Mortgage holders coming up to renewal of their loans face substantial increases in the amount of interest they will have to pay when they select from amongst the new terms on offer. This would have been true whoever was running the government, as the main cause of the rising rates is the action of the Bank of England. As both major parties claim the Bank is independent, interest rates are what they are as far as government is concerned. Neither the Chancellor nor the Shadow Chancellor wish to depart from Bank actions and advice.
Government needs to do what it can to promote growth and reduce tax rates to ease the squeeze now being created by a tough money policy. It should not expand borrowing, but seek better control over spending as the counterpart to ease the tax demands on mortgage holders and others. All the huge extra spending on lockdowns and covid treatment is now behind us. The good news is some tax cuts pay for themselves. Every time past governments cut Corporation tax rates the revenues from business went up. When the Thatcher government cut the top rates of tax on incomes the rich paid more and paid a bigger share of the total. If the government reversed the tax changes hitting the self employed it could stimulate more people to work for themselves, expanding the capacity of the economy. If the government raised the threshold for small businesses before they need to register for VAT there would be a surge of extra work taken on leading to more revenues from other taxes. If the government removed VAT from domestic fuel it would help directly in getting the inflation rate down, with beneficial effects on future government spending.
Were a government or the Opposition to propose higher taxes and more borrowing that could make the position worse. It might make the Bank want to force up interest rates more. The Bank is currently encouraging those operators in the markets that want to cut the price of UK government bonds by its gloomy tone. It is driving up state borrowing rates more. It would probably do even more of the same if it felt government policy was spending and borrowing too much. Today with no such fear the Bank still wants rates higher to curb inflation.
It is never easy recovering from a bad mistake. In 2021 the Bank of England confidently forecast 2% inflation for two years time. Now we have arrived inflation is four times that, a major forecasting error. Those who thought the Bank was creating too much money and buying up bonds at very high prices in 2021 were told we were wrong. When some challenged the inflation forecasts as prices started to climb the Bank sought to reassure by saying the inflation would be temporary. Last year and this the Bank changed its mind and its estimates, and has gone in for a long period of rising rates and credit tightening.
Today the Bank forecasts tell us inflation will come back down to below 2%. If they believe that why the need for yet more rate rises? If they do not believe it why are they not working urgently on their forecasting models to come up one that could have forecast what has happened in the last three years, giving it more chance of forecasting what happens next? Mortgage holders would like a less volatile policy, where inflation stays better anchored so rates vary less. Switzerland, Japan and China kept general inflation down in recent years despite the big rises in energy costs last year, showing there were other policies Central Banks could adopt to keep price rises under better control.
June 16, 2023
We have an incompetent government and an incompetent BoE. Neither have any genuine interest in the general public’s welfare. Both are untouchable (the government may change its colours to red or rainbow, but the policies will still be damaging to most people’s standard of living).
June 16, 2023
Incompetent indeed.
Sir J could also have noted the BofE sets the affordability criteria tht commerial banks need to follow when making mortgage offers to customers. The Bank has made a big deal of these criteria, claiming they will prevent some of the problems of the past. A 5% base rate isn’t out of the ordinary based on historic patterns. If so this level of rates in itself should not cause problems for borrowers if their mortgages are truely affordable.
June 16, 2023
A 5% base rate in 1960 may well have been sustainable, but with the current financial burdens that potential housebuyers are burdoned with it is not. I mean, house prices, fuel price, food prices, repayment of student loans leave no room for vast mortgage repayments.
June 16, 2023
Current BoE rates are not ‘expensive’ in historical terms and have bounced around the 5% level since the 1800’s. What is unusual is the very high cost of property compared to average earnings, brought on by years of ultra low interest rates, thereby creating a property bubble. Bubbles do burst though and that is what will happen now. We will see the return of negative equity and some will lose their homes. Eventually balance will return but not without a lot of pain. This (as the Americans say) is already baked in.
The other side of this coin, is that prudent ‘savers’ were punished with years of zero savings rates and compounding annual inflation.
This is what you get if you print money everytime there’s a problem with the economy. We need to get back to some form of financial sanity and that means our political leaders will have to give up money printing and suffer the consequences of fiscal cold turkey. Frankly, I don’t see them wanting to do this but they may not get a choice.
June 16, 2023
Quite right. I’ve seen projections for as much as a 35% fall in house prices which is going to be far more damaging than the aftermath of the 2008 financial crisis. Lots of repossessions. Potentially unsaleable housing stock given government ambitions to try to persuade buyers to borrow money they can can’t afford for negative returns spending in insulation projects to achieve EPC C. It’s going to be a mess, all started by Help to Bubble from Osborne.
June 16, 2023
I can certainly see prices going back to pre-Covid (2019) levels Mark, about a 20% drop. Negative equity isn’t a problem for most provided a) you can renew your mortgage when required and b) that you can keep up your payments. If you can manage these two things, then in time valuations recover. I’ve always told my kids that houses are not investments just homes. They don’t appear to understand this view but perhaps they will now…
June 16, 2023
Ian T
Agree +1
June 16, 2023
The incompetents in the Monetary Policy Committee are obviously in a panic. They have âpulled the levers of power and nothing has happenedâ. They have no idea why this has happened, and any day now we will have then reciting Pelosiâs analysis âthe cost of living crisis (aka inflation) is a worldwide phenomenon and I am not going to comment on itâ.
1. High interest rates donât bring down price rises created by, for instance, refusing to buy energy from your longterm, cheap, supplier.
2. Assessing the impact of increasing base rates usually require a modicum of patience to see the result when I works through – the bank want a magic bullet – fixed tomorrow. They donât wait to see the results of their eccentric experiments before exacerbating them.
Sir John, why do you advocate the removal of VAT from domestic energy? Vat rated companies pay no VAT on energy, but small business and start-ups, of which I agree we need many, pay 20% VAT on their energy. Itâs a killer! Why not âremove VAT from energyâ?
June 16, 2023
Lynn you are far too logical for the current incumbents enjoying end of life care.
June 16, 2023
If, if, if.
If this appalling Government did the things you propose Sir John, it would be a Conservative Government. But it isn’t: it doesn’t matter how we vote, we’re not allowed conservative policies.
If the PM / Chancellor sacked Bailey because of his incompetence (which might encourager les autres) and recruited someone who was prepared to change the flawed models they’re using, there might be a long-term benefit. But they’re not going to do that. The IMF, WEF and Senile Joe won’t permit it.
So it’s full steam ahead – to an even more destructive Labour Government.
June 16, 2023
The only Conservatives on the block are Reform, so give it some thought.
June 16, 2023
You can blame the Bank of England as much as you like, but you wonât escape the blame. This is a repeat of the late 80s / early 90s. Then you royally screwed up and the housing market crashed, there was a recession with high interest rates and house repossessions. Who got the blame? The Tories! Followed by 13 years of Labour. They royally screwed up and now weâve had 13 years of your lot. The pendulum swings. We are now in for Labour until they screw up again.
ALL you have to do is keep things ticking over and people are quite happy. But this requires government and the public sector to be quietly efficient.
All you have to do is say âgovernment spending will only ever be x% of gdp.â You have to get people in the public sector to realise that there is not a bottomless purse. But that would require competent people in government.
Start with a simple golden rule âno-one employed in the public sector can earn more than the Prime Minister.â If the council leaders and vice-chancellors on half a million donât like it – they can leave and see if someone in the private sector thinks they are worth half a million a year.
You piss money away like a drunken sailor and stumble from one crisis to another. Oh for competent government.
June 16, 2023
Put accurately and directly.+++
June 16, 2023
No MP should be paid. That would get rid of all the wide boys and people would have to prove themselves before legislating (same principle as horse racing – you have to be a winner before you breed the next generation).
No government should be allowed to set up fascades, like the BOE, committee for budget responsibility, NHS trusts etc. behind which they hide. All these jobs are Government Jobs and MUST be done by the government. That might make them wonder whether they want to run education, health, agriculture etc etc etc.
June 16, 2023
Should they have an estate, agricultural labourers beholden to them, gardeners and indoor staff too?
June 16, 2023
If they have earned their own money, of course. But not from profiting from their elected job.
June 16, 2023
Wonderfully put
June 16, 2023
Mike – wonderfully put
June 16, 2023
Yes, clearly a new political party of ‘common sense’ is needed.
1. Establish policies that actually benefit the UK.
2. Root and branch Reform of the civil service so that they carryout 1. Above.
3 take full advantage of our recovered independence – economically, socially and foreign relations.
June 16, 2023
Well said Peter.
Could add to your list:
4. Public sector to be limited to activities that cannot be carried out by the private sector (health & education for a start).
5. Massive reform of both houses of parliament. If the US senate can manage with 100 senators for a population of 350m why does our House of Lords need 700+?
June 16, 2023
Why can the private sector not deal with health and education? When they were delivering those services (free where necessary) people left school at 14 with more education than the 45 year olds scamming their way to Phds today.
During the war, when the health service had to deal with a genuine crisis, they invented âplastic surgeryâ, they scraped the tub-hip of a 4 year old relation of mine successfully such that he ran for Birchfield Harriers later, and kept him in hospital for 4 years, free of charge.
June 16, 2023
I meant health and education to be delivered by the private sector. State delivery of these services has been expensive and ineffective. Could point to many more areas as well – transport, energy, civil engineering projects…
June 16, 2023
Sorry, I misread. Yes I could not agree more!
June 16, 2023
Yes Peter you put it politely.+++
June 16, 2023
@Peter Wood, @PeteB
I think in the real World that thinking comes from Democracy. The type of Democracy that those we empower and pay step up and do their job – instead of flatly refusing.
To that I add the House of Lords has no validity, legitimacy or point in a Democracy. Its a bunch of friends-of-friends living off the taxpayer because they cant get a real or proper job.
The Public Sector, is now just as corrupt should be fully politicised. They have shown they are not impartial, clearly they brief against those elected. So that there is then no doubt, that those given the task are fully working for the majority of people, for the Party in Power.
June 16, 2023
Never mind the gilts issue, the reason inflation remains so high is because, despite the recent major falls in the wholesale price of gas, petrol and diesel the public is still being charged extortionate prices for their fuel at the pumps. This knocks on to food transport, cold storage and other high energy usage industries and is now affecting wage settlements as we enter a typical British wage/price spiral.
This government is quite happy to alow the public to be ripped off in this way because they are taking tremendous sums in extra VAT. The public will show what they think at the forthcoming by-elections
June 16, 2023
I’m glad you realise SG that high energy prices negatively affect economic growth, employment and the resulting tax revenues.
Petrol and diesel is taxed at approx 70%
Try running a business where you need to compete with other nations where fuel is very much cheaper.
June 16, 2023
Sakara
Certainly agree the price of all energy types should be tax free, and subsidy free, then we would know the true cost of all of them.
We may even find home produced energy is the cheapest of all, be it oil, gas, wind, solar, or anything else, one thing is sure, importing the basics of life is a recipe for disaster.
I see wet now have water shortages in Kent, they have enough water but demand is exceeding the ability to supply, is it any wonder when the population is growing but the infrastructure just stands still.
June 16, 2023
Mortgages for house purchase are a broken mechanism. The price of property as a percentage of what people earn has skyrocketed. Young earners who aspire to property ownership have had financial burdens lumped on them in the form of tuition fees. They are penalised for aspiring to higher education, pretty dumb of government who, in the areas that count, are suffering a dire shortage of doctors, nurses, engineers,and scientists or put another way, potential house buyers. Add to this inflation in fuel and food that for some time has looked predatory. The bottom line figures for those who supply food and fuel periodically confirms this. Finally there is the BoE that seemingly has its own globalist agenda. It does not require independence to persue its role, just competence.
It leads me to think that the whole mortgage business is in need of a radical rethink to provide cheap and stable money to those who wish to buy. If government can manipulate cheap money for its grand ideas so should it for a mortgage scheme from a national bank. Mortgages can make a profit, which is more than we can expect from HS2. The other two elements in the equation are the cost and availability of land , and then the cost of house building , a process that has moved little from pyramid building times. Again government with intelligence and fairness could solve the land question, while industrial factory construction would solve building costs. Our present atrophied and lamped government does not have the intellectual power or will to do either, so add it to all their other screwups as they sit in deaths waiting room.
June 16, 2023
EU Mandatory Migrant Quotas to become law. Expect millions under Labour unless the Tories expose the sinister immigration plan of the Left across Europe
June 16, 2023
Amidst all the pessimism, gloom, and utter folly, I would just like to say a big thankyou to you and others in your party who are true to their principles. Thankyou especially for your efforts to tame the duplicity of the media through competent experience and measured commonsense – a daunting and wearisome task! please keep going, Sir John, and I hope you take time-out to encourage each other on ‘the back-bench front-line’. We appreciate all your hard work!
June 16, 2023
@Norman – I second that, unbelievable stamina when forced to talk to people with their fingers in their ears.
June 16, 2023
The reply you received to the question in your subsequent post demonstrates very clearly that the Bank and the government are in lockstep in their determination to drive the economy downwards. I cannot help wondering if you might not now find that to attract more thoughtful listeners on the other side of the House, who must at least be wondering how things might be done differently.
June 16, 2023
The only âthoughtful listeners on the other side of the Houseâ are the DUP and they already know these answers.
June 16, 2023
Pressure has to be put on Bailey and his Committee to resign . Their decisions have been wrong and they have wielded far too much influence . Economic growth and stimulation are urgent needs .
June 16, 2023
Sir John
The bit missed is that while the BoE failed at its job. Its was our 2 Chancellors that raised taxes to the 70 year high, creating first âwage inflationâ and then as a consequence full on inflation. It was in their gift(or it was what we pay them for at any rate) to focus on a strong vibrant self reliant economy so as to fund all the extra people these 2 have given money to, by way of non jobs.
June 16, 2023
â@johnredwood
Glad to see the Bank of England has at last decided to review why it got inflation so wrong over the last 3 years. The high price of its mistakes is obvious to all now facing large increases in mortgage costs. The Bank should do this quickly as it is still getting policy wrong.â
Amusing Sir John, another review!. Surely that’s Political speak for âwater of a ducks backâ just kick it into the long grass people will forget so we can ignore it.
June 16, 2023
Experience shows that once inflation in a developed economy goes above 5% then on average it takes ten years for it to drop to 2%. This time will be no different.
June 16, 2023
Dear Mr. Redwood:
Thank you for many years of informed and insigtful commentary. Can you expand in one of your future postings on what specific policies the central banks of Switzerland, Japan and China have pursued that in your opinion allowed to keep inflation low without raising the interest rates? Or was this the result of different macroeconomic conditions in these nations from the rest of the world? What lessons can be learned from these nations’ monetary policies by the Bank of England and other central banks (ex. the Feds, Bank of Canada etc.) that seem to coordinate yet also to compete on policies of sharp interest rates increases to tame inflation?
Reply They did not expand the money supply excessively by creating money and buying bonds
June 16, 2023
Where is Jeremy Hunt – despite the country being in economical turmoil, not heard a peep from him! Why is that?
June 16, 2023
âMark Carney has blamed stubbornly high inflation in Britain on Brexit, claiming he had warned the public that leaving the European Union would damage the economy. Mr Carney warned that the UKâs growth was also lagging behind its G7 peers because of Brexit and other factorsâŠ..The economy is just getting back to its pre-Covid level. Weâve had very strong inflation. And the order of magnitude of those supply shocks has been greater in the UK than it has been in an economy like Canada, where there is less inflationary pressure and the economyâs well above its pre-Covid level.â The returners believe theyâve killed the King of Brexit and that all the other MPs will fold (which it appears they will other than some honourable exceptions) its going to be an interesting six months, the next wage call will be October as many businesses changed to October pay reviews rather than April when the NMW/NLW was introduced this month then they did two increases in one year and screwed business over.
Carney is Canadian and he bigs up his home nation what a surprise, Canada also seems to be taking a good return on buying up British essential services, lotteries etc. Whilst our piss poor workplace pensions are investing in green without our permissions and with no choice.
Weâre being played. The overlords know that mortgage spikes will finish the tories off even though they are as you say John being created in what seems like a purposeful fashion, it is still your treasury that signs off on everything.
I donât believe half of what I read about food inflation certain brands seem to inflate their prices in the week before the ONS checks and then lowers them again, check yourselves if you donât believe me. People are getting more savvy to the benefit of German supermarkets in the UK claiming theyâre selling alternative British goods and British fresh produce ironically! Tesco, Sainsburyâs, Heinz, Unilever are all playing a foolish game the new consumers donât have the old loyalties, theyâre more aware of comparisons and try new. Iâve switched from Lurpak and Iâll never go back, Iâm actually price comparing now and am saving money as are my parents with my guidance. I make a concerted effort now to buy British.
This three ring circus about Boris, Brexit and Backroom deals is becoming a joke and the laugh is on us the people that elected you Tories honour your manifesto promises of 2019. That guy on the committee who is now after the so called âsafe seatâ of Eddisbury donât bother mate it wonât be safe if youâre in it.
June 17, 2023
âWhilst our piss poor workplace pensions are investing in green without our permissions and with no choiceâ: I told you, now weeks ago, that it was not true, and with references. You did not understand or went on a tangent saying you donât have time for SIPPs (when what I had said had nothing to do with a SIPP).
Maybe you could think again, look at which company your workplace pension is with (Aegon, Aviva, Fidelity, Legal & General, NEST, The Peopleâs Pension, Royal London, Scottish Widows, Smart Pension, Standard Life, True Potential), and see where/how exactly your monthly contribution is invested.
If you have never looked at it or done nothing following some form of auto-enrollment, you are likely to have been placed in a Default Investment Strategy aka Balanced Lifestyle Strategy Plan very likely to have a fraction of âgreenâ-related investments.
With some pension companies the investment strategy behind such plans is described, and some possible tweaking is possible.
It depends on you, and you alone, not to be put in such a default plan.
June 17, 2023
Hefner it was you that sent me down that rabbit hole investigating my workplace pension and it is in green investments and I have no choice in it.
I never said i had a SIPP!? So I donât know why you say I did. I was talking about my SMART workplace pension, I had until that point never looked at where it was invested, I got a report and discovered it is in green investments and I have a choice of high risk, mid risk or low risk but not where that money is placed, if I did it wouldnât be in green investments! However, once again you have piqued my interest and I will write to them and ask them if just mine can be moved around or if the whole companies has to move, I shouldnât have to go hunting it should be clear I had no choice but to pay as an employer.
I donât have time for SiPPs – I pay another company for a private pension provider.
June 17, 2023
Correction my husband has just walked me through how to change the investment out of the automatic default 85% green investments that are giving such a poor deal, Iâm quite cross actually that wasnât made clear to me as the return is very poor just around 1.5% pa as an average since 2016.
People are going to be so cross when they realise how little theyâre going to get from this 8% annual contribution, theyâre expecting something like the public sector get (not me I always knew it would be a scam, but plenty of people are banking on it). If you donât believe me ask more people in workplace pensions how they think their investment is growing and if it is doing well and how much do they think theyâre going to get from it each year, and I donât mean investment people.
One question, do you think it is right that people are automatically enrolled in these very poor default plans? Do you think theyâre going to be as calm as me when people say âitâs your own fault for not lookingâ they are trusting what we thought were pension experts to look after us, we didnât think we in a SIPPS situation where we have to know what bonds are and guilts and spend three hours per day looking into financial projections, these guys and gals are supposed to be looking after us. Mine is going down and down.
June 18, 2023
I think it is right that people have, one way or another, to plan for their retirement, whether through their own savings, auto-enrolment, SIPP or other ways.
I have young(ish) people in my family who did not care about pension but who were automatically enrolled. I have tried to convince them they should look at what the pension company is doing with their money. My concern is that the pension companies that benefit from these automatic enrolments are usually not very transparent regarding the amount of fees they take.
The problem is the same with the Child Trust Fund introduced by PM Brown in 2002, not a bad idea originally but resulting in a number of rather opaque investment companies where the fees and the âreturnsâ were difficult to monitor.
Thanks to people who advocated some years ago investments in ETFs.
June 18, 2023
When I was 16 earning ÂŁ23.50 per week, my Dad, a working class factory worker told me to get a Royal London savings scheme that paid my family out on death ÂŁ1000 for just ÂŁ1 per week, after ten years I would get a guaranteed ÂŁ1000 if I hadnât died. Fantastic scheme. He also told me to set up a pension 10% of my earnings ÂŁ2.30 per week so I did. He then took ÂŁ8 per week in board and if I wanted to eat anything different to the family then I had to buy my own food extra. I also had a post office savings account and a Britannia Building Society savings account (that stiffed us when they sold out) because Iâd been saving from the age of 16 a little regularly we didnât have a problem getting a mortgage even though we were effectively self-employed at the age of 19, they would only take 1x my salary though and 2x my husbands. I trusted all those companies and people to look out for my interests for their fees. I hope someone is going to be holding them responsible for these terrible returns or it is going to come back on the government that forced us all into them and people are going to expect future taxpayers to look after them because they havenât been able to put their 5% loss from their salaries where they wanted i.e into a bigger home mortgage.