Running Scared
It’s been an interesting couple of days since the rate rise on Thursday. The rise, it seems, has come as a surprise to almost everybody, especially the popular press, despite the fact that inflation is obviously way over target and oil prices absolutely demanded a boost for sterling. Many newspapers, including The Sun, even went as far as to call the decision a “shock rate rise” and ran with headlines of “Debt disaster for Britain”. Alongside this, the Insolvency Service reported a 66% rise in bankruptcy, which has hit levels of 100,000 bankrupts a year. Oliver Letwin quoted in The Sun identified the culprit:
An economy built on borrowed money is built on borrowed time. As the economy fails to live up to Gordon Brown’s expectations, the number of bankruptcies is rising faster. There is a personal tragedy behind each of these insolvencies. Gordon Brown does nothing to help by bringing in more stealth taxes and ever-increasing council tax.
Other headlines from the press illustrated the panic that is slowly ensuing as the reality of the situation hits home to the nation. The Times ran with “Houses at risk as rate of personal insolvency jumps”. The Daily Mail had “Britons are mortgaged to the hilt”. The London Metro, though, took the biscuit with a wonderful piece on Page 2 yesterday, providing the ultimate in humour with “Homeowners face rates rise setback”, and an inset story of “Halifax lifts price forecast”. They even went so far as to say that “campaigners complained it was unfair in a month of double-figure gas and electricity rises”, demonstrating the astounding ignorance of economic mechanics and the monetary system that probably pervades the majority of British homes. It seems that the BBC’s attempt to explain exactly why rates are rising did not reach all corners of the press.
And yet amidst all the panic, the positive effects of a rate rise have been almost entirely ignored. Sterling has risen to $1.90, which should keep petrol prices under control (for a few days at least), and savers, who apparently outnumber borrowers 7 to 1, will have 0.25% more interest hitting their savings accounts. Looking ahead further, inflation may even become slightly more controlled than at present, although more rate rises together with a great deal of patience will be needed before a real effect is felt. And you can bet the MPC will now use any excuse not to raise rates again too soon - after all, they must be fearing for their jobs after the recent press reaction.
