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  November 4, 2017

UK Interest Rate ​Hike​ Ignores Equitable Policy Options


In order to slow inflation, the Bank of England is raising interest rates for the first time in a decade--but this move ignores policy options that could potentially ease high levels of inequality in the UK, explains Positive Money's Ed Smythe
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biography

Edward Smythe is an economist here at Positive Money. Edward previously worked for a decade in the financial sector, including 5 years as a macroeconomist in a boutique hedge-fund. He studied economics at Cambridge Uni.


transcript

UK Interest Rate ​Hike​ Ignores Equitable Policy OptionsGREGORY 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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