Gordon Clown .Com

The Daily Express has the pick of the bad news stories for Gordon today, with its frontpage headline suggesting that inflation could lead to base rate rises up to 6%, and consequently larger mortgage bills for homedebtors.  They also include a rather telling comment about Gordon’s handwriting, based on the signature in his letter to Mervyn King.

CRIPPLING rises in mortgage bills were forecast as “certain” last night after a shock leap in inflation.

Economists tipped the base rate to rocket over the 6 per cent mark, leading to eye-watering hikes in repayments for millions of home owners.

And the mortgage misery spelled humiliation for Chancellor Gordon Brown as the Bank of England took the unprecedented step of formally warning him that prices are running out of control.

Households now face punishing interest rate rises on top of spiralling costs for fuel and consumer goods as well as the biggest tax burden in history.

A quarter-point jump to 5.5 per cent will see payments on a £100,000 mortgage rise from £722.80 to £738.99.

But if interest rates peak at six per cent as predicted by some economists, the monthly payment will soar to £771.82 – an increase of almost £50 a month. Owners paying off a £200,000 home loan – the average price of a three-bedroom semi – will have to find an extra £1,176 a year.

At the same time there is the prospect of a summer of discontent, with huge pay de­mands by unions expected to keep wages in line with rising prices. Eco­nomist Phil Shaw, of international banking group Investec Securities, said: “The inflation figures make an interest rate rise a certainty, along with the possibility of another rate rise
bey­ond that.”

Figures due to be released today from the Office of National Statis­tics showed that inflation hit 3.1 per cent last month, way above the Treas­ury’s 2 per cent target.

The rise in the Consumer Prices Index – which does not include home loans – was up from 2.8 per cent in February.

The news sent shockwaves through global money markets, with the pound briefly passing over the two-dollar mark.

In exceeding the target by a full percentage point, the inflation rise reached the level where Bank of England Governor Mervyn King is obliged to provide the Chancellor with a written explanation.

It was the first time Mr Brown has faced such a letter. In it, Mr King warned that the Bank will almost certainly hike interest rates next month from 5.25 per cent.

He said: “The Monetary Policy Committee remains determined to set interest rates at the level required to bring inflation back to the two per cent target.” This was likely to have that effect on inflation “within a matter of months”.

He blamed an “unexpectedly sharp increase in energy prices” which had offset a fall in petrol prices, and he highlighted rises in food prices caused by global weather conditions hitting production.

Firms were also raising prices of consumer goods in response to “robust” spending by shoppers. “Furniture and furnishings rose by almost 10 per cent in March, a record rise,” his letter said.

Both the Chancellor and Tony Blair tried to shrug off the inflation nightmare yesterday. In his reply to Mr King, Mr Brown wrote: “Inflationary pressures have been a feature of the major industrial countries in recent times.”

Effectively backing further interest rate rises, he added: “I agree that the Monetary Policy Committee’s approach is appropriate to the Government’s monetary policy objectives, namely to maintain price stability.” Meanwhile, Mr Blair told his monthly Downing Street press conference: “There’s tremendous pressure on families all the time. I think it’s a feature of today’s world that people are stretched.” And he risked ridicule by claiming that Mr Brown was “the best Chancellor since the Second World War”.

Shadow Chancellor George Osborne said: “Gordon Brown’s reputation for economic competence is unravelling before our eyes.” Lib Dem Treasury spokesman Vince Cable said interest rate rises “will cause misery for thousands of people in severe debt who have borrowed up to the hilt to secure a mortgage. Debt servicing problems will only get worse.”

Howard Archer, economist at Global Insight, said: “This is a thoroughly nasty set of data that essentially guarantees that the Bank of England will raise interest rates.”

Graeme Leach, chief economist at the Institute of Directors, said: “The case for a further quarter-point rise cannot be in doubt. It looks like a done deal.” Louise Cuming, head of mortgages at moneysupermarket.com, said the increase had taken the City by surprise.

It threatened those trying to get on the property ladder. “If we don’t get new buyers into the market, the market will stagnate,” she added.

Tony Woodley, general secretary of the Transport and General Workers Union, said: “Employers had better get used to the idea that our pay claims this year are aimed at winning workplace victories on pay so that workers can afford to meet their rising living costs.”

Mr Brown’s reply to the Bank of England interested handwriting experts. Erik Rees, of the British Institute of Graphologists, said: “This is the handwriting of a man whose statements you have to check and check again. The fact the word sincerely is virtually illegible is very apt.”

It’s being reported in the press today that Gordon is to face questions in parliament after telling a news conference at the IMF that selling off Gold reserves in 1999 for a cut price was the “right thing to do”, despite the fact that Gold has nearly trebled in price since then.  The Times is reporting that this single decision alone by Brown, taken against the advice of his more experienced colleagues at the Bank of England, has cost the country £2bn.  To put that in perspective, Black Wednesday - when the Major government attempted to protect sterling within the ERM - cost £3.3bn, and was seen as a massive and catastrophic event at the time.

Insiders involved in the decision have broken ranks after an 18-month battle in which the Treasury has blocked attempts by The Sunday Times to make public the official advice received by Brown before he sold the gold.

They have revealed that Bank of England officials had serious misgivings over the chancellor’s determination to sell 400 tons of bullion in a series of auctions between 1999 and 2002, when the price was at a 20-year low. Since then the price has almost trebled, meaning the decision cost the taxpayer an estimated £2 billion.

The Bank of England, which has managed Britain’s gold reserves for more than 300 years, was never asked for its advice on whether Britain should sell the gold. A senior Bank of England executive said the timing of the sale was “not debated”.

At a secret meeting with senior gold traders, Bank of England officials were warned that the proposed auctions would achieve the worst price for taxpayers. The officials are understood to have agreed with the analysis but said they were powerless to influence the Treasury.

Warnings over the risks of losing money from the gold sell-off are understood to be set out in internal correspondence sent by Bank of England officials to the Treasury in 1999.

Last night the Bank of England sought to distance itself from the decision to sell off the gold. In an unusual intervention, it said: “In regard to the gold sales, the Bank acted solely as agent and the decisions were taken by HM Treasury.”

Its statement casts doubt over previous assurances given by Treasury ministers and Tony Blair to parliament that the decision to sell the gold reserves was made on the “technical advice of the Bank of England”.

A senior investment bank director, present at a meeting held by the Bank of England in May 1999 to discuss the sell-off, said: “We were told this was a Brown thing and that the Bank had no say over what was going on. The officials were unhappy.”

The gold sell-off is seen in the City as Labour’s equivalent of “Black Wednesday”, when John Major’s government lost £3.3 billion in a day in its failed attempt to prop up the pound.

Parliamentary questions will take place on Tuesday.

Eddie George, former Bank of England governor, today admitted that he and Gordon hatched a plan a few years ago to deliberately inflate the economy by keeping interest rates artificially low in an attempt to boost consumer spending.  In order to sustain demand in the flagging economy after the .com crash of 2000, Gordon and Eddie fiddled inflation figures and cut interest rates, desperate to keep the only remaining glimmer of hope alive - high street spending.  The side effects of this have been rampant inflation and an unsustainable boom in house prices, which now it seems can only end in tears for Gordon and the country.

“But we knew that we were having to stimulate consumer spending; we knew we had pushed it up to levels which couldn’t possibly be sustained into the medium and long term.“But for the time being, if we had not done that the UK economy would have gone into recession just as has the United States.

“That pushed up house prices, it increased household debt … my legacy to the MPC if you like has been ’sort that out’.”

He told the Treasury Select Committee - investigating the record of the first decade of the MPC: “We had to take action that on the whole we would prefer not to: stimulating consumer demand because all the other elements of demand had fallen away.

“And we were very conscious of the fact that that could give rise to problems in the future.

“We tried very hard not to do more than we needed to to keep within the inflation target limits but we knew that that was going to cause problems later on which are still with us.”

Gordon and the MPC have left us in a desperate situation of spiralling inflation and massive consumer and business debt.  There is only one way this can all end, and it won’t be pretty.

With less than a week to go now until Gordon’s last ever budget speech (hopefully at least), nobody can have failed to notice the sharp slide in share prices that has reverberated around the trading floors of the world this week. Traders in London today particularly noticed, as over 150 points were wiped off the FTSE 100 leaving it teetering on the brink of the key psychological 6000 barrier.

The cause of these upsets, it seems, is a crisis of confidence in the sub-prime mortgage lender sector of the US economy, and the wider economy in general. One of the biggest sub-prime lenders, New Century, is now effectively out of business, and a whole bunch of others are lining up to follow suit. Obligingly, one enterprising blogger and former New Century employee has decided to post up his inside story of the company, and that will doubtless be worth watching over the next few days and weeks as more is revealed.

The headache for Gordon is that the bad news can’t realistically be contained just to the US. New Century’s biggest investor was none other than Barclays Bank, a name best known as one of the big four retail banks in the UK, who have been buying up Mortgage Backed Securities from other banks in an effort to increase their asset base for Basel II. One supplier of those securities it seems was New Century, and it now looks like Barclays is about to lose a whole heap of cash as the deal has turned sour. This news follows pretty soon after HSBC, another big bank in the UK, ran into trouble with its US subprime lending unit as well.

When the US economy hits trouble, and it starts costing UK banks money and threatens to hit the UK economy as a whole, you can expect the lending industry over here to sit up and take notice. Those 110%, 35 year, 5 times salary mortgages may not look quite so appealing to Abbey and the rest just now, as it becomes clear they fall right into the sub-prime category that is beset with so many difficulties in the US. And when those deals gradually dry up, the overall credit environment tightens, robbing Gordon of the “economic growth” by debt based inflation that he has been so proud of over the last 10 years. It may be too early to say that a Credit Crunch has arrived in Britain, but risks seem to be growing by the day that we’ll get one, and day by day Gordon looks ever more worried.

Against all odds, and despite contrary predictions by many large news organisations, the August MPC Meeting today resolved to raise base UK interest rates by 0.25%, to 4.75%. This is the first time it has done this in 2 years, and means that rates are back to the peak reached in late 2004. Since the MPC’s decision at 12pm today, the FTSE has dipped by 1.5%, and the European Central Bank has followed suit with a 0.25% rate rise, taking their rates to 3%. The US Federal Reserve announces its decision on rates next week, after 17 back-to-back 0.25% hikes. The BBC has met the news by offering such pearls of wisdom as “there is concern that people have borrowed too much money” and “the biggest gainers from the rate increase will be savers”.

Meanwhile, Barclays have added their name alongside HSBC and Lloyd’s and become the third high street bank in as many days to announce that bad debts are skyrocketing, and that their provisioning fund has had to rise by 50% to over £1bn. Perhaps this is a problem that one 0.25% rate rise won’t quite be enough to solve on its own.

As a nation of borrowers awaits the interest rate decision announcement from the Bank of England’s Monetary Policy Committee tomorrow, not one but two of the big four high street banks in the UK have announced that they can no longer afford to wait for interest rates to curb borrowing and are about to tackle the situation themselves. First HSBC and now Lloyd’s have announced that the rocketing levels of bad debts in the form of Bankruptcies and Individual Voluntary Arrangements are costing them too much, and that they will be forced to tighten their lending criteria to control the situation.

The effect of this, similar to interest rate rises, will be to curb borrowing amongst consumers, as high street banks will begin to offer less loans and overdrafts to people, slowing the vast supply of cheap money that has fuelled consumer spending in recent times. The banks simply can no longer afford to risk their profits by lending money out so easily. Considering that HSBC in particular has seen costs due to bad debts increase by 36% in the first 6 months of 2006, it’s not hard to see why this move has been made. Effectively the banks are taking matters into their own hands and doing the MPC’s job for it.

Further evidence of high inflation has been reported today by the British Retail Consortium, who have announced that shop prices rose at their fastest rate for two years in July. Some might say that this could tip the MPC into raising rates tomorrow, although they have ignored bigger problems in the past. Odds on a rate rise briefly hit 4-1 on Betfair today, although a rate freeze is still seen as the most likely outcome. It really is anyones guess.