Good news for homeowners with mortgages. The Bank of England has cut the base lending rate by ¼ of a percent, to 4%. The government is claiming that it has created the opportunity in the economy for this cut. The government is correct but being misleading. Let me explain.
Back in the early days of Tony Blair’s New Labour Government in the late 1990s, then Chancellor Gordon Brown handed independence to the Bank of England. The Bank was ordered to keep inflation at 2%, through monetarist policy using the bank base rate as the mechanism to control money supply. This was always seen as a very good idea and hasn’t changed since then.
The base rate is a highly technical measure, but it is a vital signal to all lenders what interest rates should be used. So, the Bank of England cuts rates, and all lenders should cut rates too.
If inflation is above 2%, then increasing interest rates tightens the amount of money in circulation. Borrowers have less available cash to spend, whilst savers save more because of better returns and the pressures on rising prices diminish. And, of course, the opposite is true. Cut of increase money in circulation, and you lessen inflation, or increase growth.
But inflation is standing at 3.6%. 4.1% when including housing costs, so why is the Bank cutting rates? Because the government has created the environment that requires a cut.
The reality is that business confidence is rock bottom and the economy is shrinking. The Bank, and many others, have identified the government’s policies of hiking tax on employment as directly behind this slowing down. Indeed, changes to the rules for overseas investors has resulted in more millionaires leaving the UK than any other country, anywhere.
So, to suggest that falling interest rates are something that the government is behind is true, but only because they have utterly messed up the economy.
To be fair, part of the rise in interest rates originally came after Liz Truss’s disastrous budget. She messed up big time and the energy crisis added to household bills. But it has been said by many commentators that the current government has messed up at least as badly as Liz Truss.
The big difference is that we realised we messed up and got rid of Truss within weeks. Labour is sticking by their Chancellor and their leader. Perhaps that’s why the new government has the lowest ever approval ratings for a new government in history.
