UK Interest Rate ​Hike​ Ignores Equitable Policy Options

GREGORY WILPERT: Welcome to the Real News
Network. I’m Gregory Wilpert, joining you from Quito,
Ecuador. The Bank of England has raised interest rates
in the UK for the first time in a decade. The official bank rate has been lifted from
0.25% to 0.5%, representing the first increase since July 2007. Bank of England governor, Mark Carney, defended
the move as necessary to respond to rising inflation. MARK CARNEY: Effectively, what the bank has
decided is to take our foot a little off the accelerator. The economy is growing a little faster than
its speed limit. That speed limit has come down over the years
since the crisis, for a variety of reasons. We’ve got unemployment at a 42 year low. More people in work than ever before. We’re seeing the first signs of waging starting
to pick up, but most importantly for those watching, that real income squeeze, which
has been hitting households over the course of this year, the worst is ending. It’s starting to turn now. Still, even with this rate move, we’re still
providing a lot of support to the economy. GREGORY WILPERT: Joining us today to discuss
what all this means for everyday British residents is Edward Smythe. Ed is an economist and researcher at the financial
research organization, Positive Money. He worked for nine years in asset management,
and as an equity analyst and micro economist. Welcome back to the Real News, Ed. EDWARD SMYTHE: Thank you for having me back. GREGORY WILPERT: Can you briefly describe
to us what this decision to raise interest rates will mean, and who we can expect the
winners and losers to be as a result of the rate rise? EDWARD SMYTHE: Okay. Well it’s worth understanding this is a very
small .25% interest change, which will benefit, to some extent those people who have deposit
accounts if the banks pass this through. It’s quite likely that they won’t do so. The people who will lose will obviously be
those people on variable rate mortgages, who will see them reset, or also people who are
on fixed rate mortgages, who will see them reset over the next couple of years. There’s certainly winners and there’s losers. And there’s also a case of taking a step back
to think about, well what’s gonna be the effect on the micro economic conditions, in terms
of the ability for consumers to take on debt, and also for businesses to invest. It’s worth thinking about this effect, not
just in terms of winners and losers, but effect on how it will drive the economy going forward. GREGORY WILPERT: So the Bank of England governor,
Mark Carney, said during the interview, “What we have been doing since the Brexit referendum
is doing our utmost to support jobs and activity in this economy.” But is it true that the only options were
to either keep interest rates where they were or to raise them? Were there other options, in other words? EDWARD SMYTHE: Well as it stands, the Bank
of England is sticking very much within its conventional thought-set, to the extent it’s
used quantitative easing to push down interest rates at the long end of the curve. We argued that effectively it’s risen itself
into a situation where it’s facing these incredibly tough choices. If it leaves interest rates where they are,
you’ll continue to drive the economy on rising debt or rising asset prices, feeding into
a household deficit, which is the highest it’s been in over 100 years, or if you raise
them, you risk bringing the whole deck of cards down, to the extent that that debt then
becomes vulnerable or asset prices come down. So what we’re saying is that you need a radically
new tool, a tool which is overt monetary financing to enable banks, the central bank, to create
money, a certain amount of creditably constrained money, which goes directly to government,
so that they can boost spending in a sustainable and fair fashion. GREGORY WILPERT: I mean, what kind of tool
are we talking about? Can you give us a little bit more detail? EDWARD SMYTHE: Over at M4, we sometimes call
it QE for people. Is the policy whereby imagine the central
back could produce 60 to 70 billion pounds worth every year to purchase zero interest
perpetual bonds from the government, and it would enable the government to then deliver
that spending into the economy to deliver jobs, etc., and to spend it on the things
that we actually need, like health care, education, and infrastructure. And boost the productive capacity of the economy. GREGORY WILPERT: Let’s take a look now at
the issue of inequality because that’s been one of the major issues that you’ve also been
concerned with. Last year, Mark Carney argued that inequality
in the UK was actually declining and that the poorest people in Britain saw the greatest
gains and wealth as a result of the other kind of quantitative easing that they had
been implementing. However, recently you wrote an article entitled
The Bank of England’s Depiction of Inequality Data is Dangerously Misleading. Explain to us what your concerns are, with
regard to how the Bank of England is speaking about inequality in the UK. EDWARD SMYTHE: This was the 2016 speech by
Mark Carney where the governor set out to talk some hard truths, to talk about some
of the issues that people have been talking about, inequality and relation to the policies
of QE. Now he presented a chart in this, which talked
about the fact that the lowest quintile in terms of those who own wealth, the lowest
20% had gained the most over the period from 2006 to 2008, to 2012 to 2014. On a percentage change basis, they’d seen
their wealth go up 43% and all Quintiles have benefited. What we did was we looked at the underlying
data to see, well what were the absolute numbers for each of the different Quintiles. What we found was quite disturbing because
actually the lowest quintile, although they had the highest percentage increase, actually
had an absolute increase of only 1,600 pounds, so they went from minus 3,800 pounds to minus
2,200 pounds. They were still in debt at the end of this
period. If you said the top quintile, the top 20%,
they saw their assets go from 980,000 pounds to 1.3 million pounds, so an increase of 320,000
pounds, or 189 times that of the poorest quintile in society. The idea that this can be presented as a chart
in which the poorest have gained most, we do think is dangerously misleading. And the real consequences of this is that
when Mark Carney says it’s important that the government takes fiscal steps to offset
the effects on monetary policy and how it has effected wealth inequalities, it’s very
difficult to do so if the government isn’t being presented with its data in an accurate
fashion. And also, Mark Carney would do well to perhaps
come out with some suggestions about what sort of fiscal policy he would have in mind
to help redress such big swings between the top quintile and the bottom quintile of wealth. GREGORY WILPERT: Let’s just quickly take this
back again to the issue of the interest rate rise. What effect would the interest rate rise have
on inequality in this context? EDWARD SMYTHE: Obviously the danger is, if
the interest rate does trigger a reduction in investment at a time when actually business
uncertainty’s already rising with the negotiations in Brussels. If it does have an impact on the ability for
consumers and students to take on extra debt going forward, it does mean that it will put
the brakes in the economy at a time when actually the economy and real wages are already struggling. And it potentially creates the conditions
for the next financial crisis, or at least front-loads the timing of that crisis. Then the implications to inequality are very
significant indeed. If that doesn’t happen, we’re back to the
original starting conversation, in terms of there are some people who will be highly leveraged
with variable rate mortgages, who will suffer, and in fact it’s more likely that the banks
will not pass this on. So few depositors will actually see their
interest rates rise to see a benefit here. GREGORY WILPERT: Okay. Well we’ll continue to keep an eye on this
situation with regard to the economy, and we’ll probably get back to you. We were speaking to Edward Smythe, an economist
and researcher at the financial research organization, Positive Money. Thanks again, Ed, for having joined us today. EDWARD SMYTHE: Thanks for having me. Thanks. GREGORY WILPERT: And thank you for watching
the Real News Network.

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7 thoughts on “UK Interest Rate ​Hike​ Ignores Equitable Policy Options

  1. I'm ashamed that Mark Carney is a fellow Canadian. He is a bad actor, creating policies only for the benefit of the Oligarchs.

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