Inflation, Interest Rates & Houses: How Has the Bank of England Got It Quite So Wrong?

After having just scraped through a tumultuous year by the skin of his teeth, when Rishi Sunak the Prime Minister took to the stage in January pledging to halve inflation by the end of 2023 he must have felt like he was Manchester City just needing to overcome the might of Gillingham Football Club from the lowest division in the professional football pyramid, to win the FA Cup. What could possibly go wrong? Virtually every forecast out there was predicting substantial falls in inflation by the summer, and although the levers to control inflation aren’t actually within his gift, it was something Mr Sunak could quite easily claim the credit for. Shock horror, it hasn’t gone to plan. With no significant decrease in inflation in sight and a ticking time bomb waiting to go off in the housing market, the question really needs to be asked - how has the Bank of England screwed it up so royally?

Just before the invasion of Ukraine, the Bank of England, one of the world’s oldest banks and the UK’s Central Bank, predicted that the rising rate of inflation following lockdown was likely to be temporary, and as such, they had a laissez-faire attitude towards inflation - happy days right? Mmmm, maybe not. Following the invasion of Ukraine, the Bank’s view shifted fundamentally - inflation was no longer transitory and was, in fact, here to stay. 

Despite knowing that rising inflation was on the horizon, the Bank was engaged in a thinly veiled arse-covering exercise rather than looking forward, resulting in a painful drip, drip, drip of small rate rises culminating in a record base rate of 5%, and in the process allowing the public to get used to each one before adding another; the highest base rate there has been in 15 years without the shock and awe effect which might have dampened down consumer spending. 

To make up for their fundamental shift in outlook, the Bank decided to borrow a tactic out of the Government's playbook and blame inflation and the need for rate rises on Brexit, Covid, supply chains, the Lettuce and Kamikaze mini-budget, stopping just short of blaming Gareth Southgate’s England team for failing to win the Euro final at Wembley! And because they decided to kick the can down the road, far from bringing down inflation, they’ve actually managed to create a situation where we’re completely snookered; the Bank’s putting up interest rates to control inflation, leading to extreme rises in the cost of debt and mortgages and fuelling demand for higher pay awards. And whilst doctors and nurses and private sector workers are by no means demanding Premier League football players’ wages, every 1% rise in employment costs directly results in increased costs to business and the Exchequer which invariably results in higher prices; cue inflation and the beginnings of an own goal.

The Bank has conveniently forgotten the fact that almost 9 in 10 mortgages are fixed, meaning rate rises won’t impact the majority of households in the short term. Instead, only a proportionately tiny cohort of households, which estimates put at 1.3 million, on variable-rate mortgages or coming off a fixed-rate mortgage, are going to be bearing the brunt of the extreme rises in mortgage rates in the short term.  This figure will of course grow, but only with time, which is rapidly running out before the final whistle; the next election.

And the mortgage market isn’t the only casualty in the Bank’s woefully inept battle to tame inflation. Rate rises have absolutely decimated the rental market, as landlords - many of whom have mortgages - are now hiking rents to try to keep up with payments, with estimates putting rental price rises at their highest rate in 7 years!  Doesn’t seem unreasonable for those tenants to be asking their employers for higher pay awards…and the circle continues.

Transparency and accountability are the bedrock of any financial institution, and if that’s the case, how can we trust the Bank to get us through this protracted period of hot water when the closest thing we’ve had from them to an admission that things haven’t exactly gone to plan is that people should ‘hold their nerve’?

It’s time the Bank and the Government stopped beating about the bush and were brutally honest with people, as previous governments who found themselves in this position with this strategy have; “if it ain’t hurting, it ain’t working.” They want to hurt peoples’ pockets to tame inflation and protect the sterling, but they’re going about taming it by wielding a blunt, arbitrary and possibly outdated tool, which has actually ended up placing an undue burden on a small cohort of households in the UK without the intended effect.

To add insult to injury, we are seeing banks put up rates to borrowers whilst not putting up rates commensurately for depositors - the result being that depositors are getting diddly squat and the incentive for people to save rather than spend is diluted.

At some point, the Bank has to acknowledge that putting interest rates up just isn't having the desired effect, and it’s not just me saying it - the stats speak for themselves, we still have the highest level of inflation in the G7!

It’s time that the Bank put its hands up and acknowledged the reality - that they’ve been asleep at the wheel and have got it wrong on a monumental scale! If we’re to have any chance of getting out of this mess they need to face up to the fact that what they’re doing isn’t really working.

Unfortunately, now that they’re awake they’re pulling a lever which is pushing us closer and closer to the brink, so much so that we are teetering on the edge of a mortgage-induced recession.

So it’s halftime in the final and Gillingham FC is not only still level against the might of Manchester City, but surprisingly on top.  Will we see a change of tactics and players in the second half, or are the Bank of England and the government going to hold THEIR nerve?