ANDREW FISHER on the ‘collective irrationality’ over interest rate increases which can only make an already bad economic situation much, much worse – with some residents in this borough facing mortgage increases of more than £5,000 per year
In the middle of the Vietnam War, an American Major told a reporter, “It became necessary to destroy the town to save it.”
There’s the same kind of sentiment surrounding the economy in much of the commentary coming from the Bank of England and the Treasury, as they hike interest rates during the most prolonged fall in living standards in British economic history.
Yes, it may cause a recession, repossessions, and unemployment – but it’s the only way to save the economy!
Yesterday lunchtime, the Bank of England announced it was going to increase interest rates for the 13th consecutive time, with the base rate going to 5per cent, the highest level since the global financial collapse in 2008.
Like some medieval quack that can only prescribe leeches, the Bank of England has decided that the solution now is, yes, you guessed it, more leeches.
John McDonnell MP, the former shadow chancellor, said, “A collective irrationality seems to have taken over.”
This is very bad news for anyone in Croydon with a mortgage or with personal loans or credit cards, or who is likely to require a loan in the coming months.
There are more than 50,000 households in Croydon with a mortgage – with the highest proportion living in the Croydon South constituency of former Treasury minister Chris Philp.
If you’re renewing a fixed-term mortgage deal, then you could soon be in for a significant increase in your mortgage payments.
Nearly three-quarters of mortgage holders have either renewed their mortgage in the last six months or will have to in the next three years (equating to about 36,000 households in Croydon).
The hike in interest rates means the average mortgage-holder will – according to the Resolution Foundation – be paying an extra £2,900 per year.
Many households with a mortgage will struggle to find an extra £240 per month at a time when rising energy and food costs are already hitting their finances.
The situation is likely to be worse in Croydon, where house prices are significantly higher than the UK average, and therefore mortgages are larger. In Croydon South it is estimated that the average increase facing a mortgage holder will be an extra £5,200 a year – or £433 extra per month.
If you thought the Conservative Mayor’s 15per cent Council Tax hike was bad, wait till you pay the Tory mortgage premium…
Households in Croydon North and Croydon Central will fare little better – with the average mortgage increase there likely to be an extra £4,000 and £4,300 respectively a year.
Every penny paid in mortgage repayments will be a penny not being spent in the local economy – dealing another blow to the retail and hospitality sectors at a time when many businesses are already struggling.
Interest rate rises as a means of tackling inflation can work in certain circumstances – for example, when inflation is caused by a rapidly growing economy and increasing consumer demand. Interest rate rises deter borrowing for spending by making it more expensive. These were the circumstances that prevailed during the “Lawson Boom” in the 1980s, when Thatcher’s Chancellor of the Exchequer Nigel Lawson was advocating Bank of England independence.
In the end it was the New Labour government in 1997 that granted the Bank of England independence, with the mandate to maintain low inflation – a 2per cent target – using interest rates to control inflation.
The problem for politicians and the Bank of England is that we are not in circumstances similar to the late 1980s, and the policy response needs to reflect that reality.
Comparisons with the 1980s and early 1990s are misplaced – then, real wages were rising, the economy was growing, house prices were significantly lower and households were not as leveraged (that is, up to the eyeballs in mortgage debt).
After 40 years of house price inflation, many home-owners today are having to pay mortgages that are three, four or even five times larger than people were dealing with back in the mid-1980s. And that means that the interest rate rises today are also much, much bigger.
Today, the economy is stagnant, and wages are falling in real terms, and are lower in real terms than before the banking crash 15 years ago.
Households are spending a much higher proportion of their income on housing costs – and therefore even relatively small increases in interest rates risk mortgage-holders falling into arrears, increasing the dire risk of repossession.
Britain currently has the highest rate of inflation, among the lowest economic growth and the worst performance on wages. Tackling these three economic failures simultaneously takes some skill, while tackling one in isolation risks worsening the others.
As research by the union Unite has shown, profiteering has become endemic, with the top 350 British firms increasing their average profit margins increased from 5.7per cent in the first half of 2019 to 10.7per cent in the first half of 2022.
Unite has termed this “greedflation”.
Other countries in Europe have lower inflation than Britain and their governments have done more to control prices by capping energy bill rises more, regulating supermarket pricing and cutting transport costs.
Even the woeful Bank of England notes in its report that “price-setting” is playing a large role in driving inflation and that wages are only rising at the top end of the economy, with increases “concentrated in higher-paying sectors such as financial and business services”.
Bank profits in the UK rose to £37billion in 2022, and their profits in the first quarter of 2023 put them on course to exceed that this year, funding record bankers’ bonuses. Meanwhile, those in debt or with mortgages will feel the pain.
As the old Music Hall classic goes, “It’s the same the whole world over, it’s the poor what gets the blame,
“It’s the rich what gets the pleasure,
“Ain’t it all a bloomin’ shame?”
- From 2015 to 2019, Andrew Fisher, pictured right, worked as the Labour Party’s Director of Policy under Jeremy Corbyn. He is a former chair of the Croydon Central Constituency Labour Party. Fisher is also the author of The Failed Experiment – and how to build an economy that works, and now writes regular columns for InsideCroydon
Andrew Fisher’s recent columns:
- Getting Johnson out: lying ex-PM exposes Sunak’s weakness
- 4.2m children are living in poverty because of Tory failures
- ‘The Tories in England are enthusiastic only about ground rent’
- The solution to Perry’s finance problem: Fund Croydon Fairly
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