Inflation’s up, and with it, interest rates. Supposedly the rise of the latter will counter the rise of the former, but I can’t see it happening. The fifth quarter-point rate rise was announced by the Bank of England yesterday, to the distress of millions of working people who are nominally “homeowners” and up to their eyeballs in debt.
This increase in the cost of borrowing has been decided by the Monetary Policy Committee, who are unelected and not subject to control by elected representatives. This is the capitalists’ version of economic democracy – and it was introduced by Gordon Brown to much applause a decade ago.
From the horse’s mouth:
Bank of England Raises Bank Rate by 0.25 Percentage Points to 5.75%
5 July 2007
The Bank of England’s Monetary Policy Committee today voted to raise the official Bank Rate paid on commercial bank reserves by 0.25 percentage points to 5.75%.
In the United Kingdom, output growth has remained firm and appears to be evolving in line with the Committee’s most recent projections. Credit and broad money continue to grow rapidly. The pace of expansion of the world economy remains robust.
CPI inflation fell back to 2.5% in May. Lower gas and electricity prices mean that CPI inflation is likely to continue to fall back to around the 2% target in the course of this year. Although pay pressures remain muted, the margin of spare capacity in businesses appears limited and most indicators of pricing pressure remain elevated.
The Committee judged that, relative to the 2% target, the balance of risks to the outlook for inflation in the medium term continued to lie to the upside. Against that background, it further judged that an increase in Bank Rate of 0.25 percentage points to 5.75% was necessary to meet the 2% target for CPI inflation in the medium term.
The minutes of the meeting will be published at 9.30am on Wednesday 18 July.
Note to Editors
The previous change in Bank Rate was an increase of 0.25 percentage points to 5.5% on 10 May 2007.
Now, despite the fact that the MPC is independent of government control, that doesn’t mean that people won’t blame the government. The NICE decade hailed by the Bank’s governor Mervyn King – “non-inflationary, consistently expansionary” – is seemingly over. Inflation has been above the government’s target for over a year, and the wage restraint imposed on the public sector is coming under attack from workers as a result.
NHS workers in Wales and Scotland will receive the 2.5% pay “increase” upfront after the devolved governments bowed to pressure from the unions and threats of strike action. Still below inflation, the “increase” is de facto cut and Unison in Scotland is moving towards industrial action:
Unison said a 2.5% pay rise “imposed” on them by the Scottish Executive was an insult to low-paid workers.
UK ministers have agreed to re-open talks with unions to avert industrial action in England.
Scottish union officers have written to Health Secretary Nicola Sturgeon urging her to get involved in UK negotiations.
At a meeting on Tuesday in Glasgow, delegates representing 60,000 workers in Scotland, voted to support a UK ballot for industrial action.
The BBC reports it as though Scottish NHS staff were somehow greedy: “despite the offer of a better pay rise than their English counterparts”. I expect that the tabloid headlines will be a lot more stinging, but there will be a lot of support for NHS staff if they do take action.
Recent strikes by nurses in Ireland have shown that it is possible to withdraw labour without harming patient care; in the UK the national movement against cuts and privatisation in the NHS has grown in recent years.
As rate rise will make it harder to impose 2.5% on the public sector, perhaps Brown will come to regret his decision to renounce control over monetary policy…
It cannot be that inflation is being driven by consumer activity, as consumers have less to spend already. This report came out a few weeks ago:
Bills squeeze household finances
The finances of the average UK household are being squeezed harder than at any time in the past four years, a survey warns.
Research by the accountants Ernst & Young says higher taxes, mortgage payments and household bills are, on average, now taking up 78% of incomes.
That is the highest proportion since 2003, when 72% was being absorbed by household overheads.
The accountants say that higher interest rates are the main reason.
“Big rises in household costs continue to outstrip wage inflation,” said Tim Sleep of Ernst & Young.
“Increasing mortgage payments, driven by the four interest rate rises since last August, are having the biggest impact on the consumer.”
As well as interest payments, the accountants point to other household costs, such council tax bills, water rates, pension contributions and petrol, which have all been rising faster than general inflation.
The result is that money left over for other things – what economists call “discretionary spending” – has dropped from 28% of the average household’s gross income four years ago to just 22% now.
According to Ernst & Young’s calculations, this means the average home now has £51 a month less to spend than it did in 2003, after paying these monthly overheads.
The cost of overhead bills has risen by 32% in that time, driven by higher mortgage payments (up by 65% at £699 a month) and debt repayments (such as credit cards), which are up by 30% at £104 a month.
Other costs that have also risen sharply are petrol, council tax and pension contributions, although utility bills are lower, as is the general cost of running a car.
Could it be then that the reason for having further rate rises is to shift the burdon of wobbles in the capitalist system onto the backs of working people? Surely not!