6 September, Friday, 2024
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HomeSourcesexpress.co.ukBoE is about to make its biggest mistake

BoE is about to make its biggest mistake

Bank governor Andrew Bailey called inflation wrong from the start, when he dismissed early signs of rising consumer prices as “transitory” in autumn 2021. The BoE’s rate-setting monetary policy committee (MPC) has since hiked borrowing costs for 13 meetings in a row to five percent, and that’s not the end of it. In August, the MPC is expected to hike bank rate by another fifty basis points to 5.5 percent, and markets reckons there will be more to come. Yesterday, traders were betting that base rate will peak at a whopping 6.5 percent, while JP Morgan says it could hit seven percent “under some scenarios”. While this will be yet more good news for savers , it spells disaster for more than two million homeowners on fixed-rate mortgages that expire over the next 18 months. They will see their repayments rocket and many risk losing their homes as a result, and Andrew Bailey should bear much of the blame. Today’s inflation nightmare isn’t entirely his fault. Putin’s war, the energy shock, post-Covid supply shortages and widespread profiteering have all played a part. Yet Bailey laid the groundwork by holding interest rates at ultra-low levels for more than a decade after the financial crisis, rather than slowly pushing them up. By keeping borrowing at stupidly low levels, he helped drive house prices to today’s unsustainable highs, which will worsen any house price crash . After missing inflation on the way up, Bailey and the MPC risk making an even bigger mistake by overdoing it on the way down. Increasing interest rates to 6.5 percent would do far more harm than good. It’s totally unnecessary. So of course the BoE is keen to do it. If the Bank of England hikes base rates to 6.5% we’re in serious trouble (Image: Getty) Today’s Halifax figures show house prices fell 2.6 percent in the year to June. Most of us would have expected much worse, given all the gloomy headlines out there. The reason house prices haven’t crashed yet is that monetary policy acts with a lag, and takes time to feed through to the real world. Millions of homeowners are still protected by dirt-cheap two and five-year fixed rate mortgages, and all those base rate hikes haven’t made a blind bit of difference to them so far. That will steadily change, as more deals expire. If Bailey is so sure higher interest rates will see off inflation, he should allow time for his policy to work. Especially since there are growing signs that prices have peaked and will start to fall in the second part of the year. In the US, headline inflation has fallen for 11 consecutive months to just four percent in May. That’s less than half its peak of 9.1 percent in June last year. It’s forecast to slide again in June, to around 3.2 percent. UK inflation is stickier at 8.7 percent, yet at some point global trends such as falling interest rates will drive it down here, too. Bizarrely, the US Federal Reserve is also hanging tough on rates and is expected to increase its funds rate to 5.5 percent this month. As we have learned, where the Fed leads, Bailey slavishly follows. Both central banks have been savaged by critics and both are now making the same mistake by cracking down too hard, too late on inflation. READ MORE:  House price crash fears multiply as mortgage rates blast past 6% and head for 7% What worries me is both the Fed and BoE are fixating on employment. The BoE keeps warning of a wage-price spiral that is barely even happening. Today’s low unemployment figures worry them, because they fear it gives workers too much bargaining power. If it did, workers would be feeling a lot richer than they do today. So central bankers will keep hiking rates until we fall into recession and more of us lose their jobs, when Bailey should be the one heading for the job centre. David Kelly, chief strategist at JP Morgan Asset Management, is one of many warning that further rate hikes risk triggering a banking crisis and recession. “It increases the risk that millions will lose their jobs in fighting a war against inflation that has mostly been won already.’ Once again, Bailey is way behind the curve. After being too slow to hike rates when inflation took off, he’s turning up the heat just as it peaks. Unfortunately, the BoE can’t spot a policy error without making it, so my guess is it will keep pushing up rates until house prices crash and we sink into a needless recession. It’s madness. Which is exactly what we’ve come to expect from the BoE.

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