Expert said the Bank of England could have avoided drastic rate increases
The mortgage market had seen record low interest rates since the financial crisis in 2008, however, as some normality returns and rates climb again, one expert believes the Bank of England got its policy wrong.
He said the central bank should have gradually upped rates, from the record lows seen, to more stable levels in order to avoid the drastic and impactful rate hikes we are witnessing now.
Interest rate - meltdown
Since the near meltdown of the financial crisis in 2008, global interest rates have been at rock bottom.
Samuel Mather-Holgate (pictured), director of Mather & Murray Financial, said there was a concerted effort to pump more money into the economy at a time of crisis that, arguably, saved the banking industry as we know it.
“During this period of relative stability, the central bank should have been very slowly and gradually increasing rates to a near normal level,” he said.
Instead, Mather-Holgate said it hunkered down with ultra-low rates and purchased nearly one trillion pounds worth of bonds through quantitative easing; a policy that it seems unable or unwilling to unwind despite it being an attractive tool in the fight against inflation.
“While we all know hindsight is 20/20 vision, it does not take a clairvoyant to predict that we may have another financial emergency in the future and we need an arsenal of weapons to react with,” said Mather-Holgate.
Interest rate – wrong doings
Mather-Holgate said that considering the Bank of England has not admitted to any mistakes or contributory actions that have made inflation take off, he believes it is unlikely they are best placed to deal with the current economic situation and to be forward thinking enough to see what is coming down the tracks.
While Mather-Holgate said he is pleased with where rates are, he disagrees with the route the bank took to get them there. He believes the real question, now, is what is next.
“Despite revised forecasts from the bank, that you must take with a handful of salt, it said that we will go through a recession lasting over a year and unemployment is set to rise significantly,” he said.
Mather-Holgate added that the sharp spike in energy costs will have been in the system for a year from May and have actually fallen over the last several weeks; this, he said, means inflation will fall in the Spring and could even reach the central bank target in the summer.
“Considering these facts and the huge pressure on households and businesses, it seems ludicrous that Andrew Bailey, governor of the Bank of England, is talking about further rate rises and a terminal rate of 4.5%,” he said.
Mather-Holgate believes two of the monetary policy committee members have already seen sense by voting against the last interest rate hike.
“After all, they do have quantitative tightening if they want to keep downward pressure on inflation without penalising the general public,” he added.
Interest rate - inflation
Under normal circumstances rate rises would impact inflation, but Mather-Holgate said when price rises are imported from abroad on essential utilities, raising rates does not control prices.
He added that demand is already weak and not an upward contributor to prices.
“The only thing the Bank of England is doing is causing pain to homeowners who have seen their mortgage bills sky rocket, forcing rents up as landlords see their finance costs go up, ensuring businesses make redundancies as commercial loans increase and demand weakens,” Mather-Holgate said.
He believes it is a ‘sadistic’ policy that will see unemployment climb, homelessness rise and the economy crippled.
“There is another way, they should pivot sooner, rather than reacting to another crisis they have caused,” Mather-Holgate concluded.
What are your views on the Bank of England’s interest rate policy? Let us know in the comments below.
