Former Bank of England chief economist has warned that there will be “more pain” for households and the economy as rising mortgage rates impact bank accounts and reduce spending.
Andy Haldane is the chief executive of Royal Society of Arts. He said that it was difficult to see the impact of rising interest rates after he left Bank of England and its rate-setting committee in June 2021.
Since late 2021, the Bank of England has increased its key interest rates sharply from 0.1% in November 2021 (a historic low) to 3.5% by December 2022. At the same time, big energy price rises and inflation in a wider range of goods and services have impacted British households.
Haldane said that “it is painful” and warned of more to come when the mortgage rate increases from last year start to affect people’s bank accounts.
“I would prefer the Bank and other central bank to have begun their rate rises sooner. This would have been a good way to stop inflation from getting out of control. It would also have meant we wouldn’t have those rate increases at the same moment as the economy was hitting its buffers. However, this global shock would still bring significant pain, even through higher rates.
In November, the Bank warned that the UK could enter the longest recession in 100-years. This was due to inflation which caused households to reduce their spending and dragged down GDP growth.
According to the Office for National Statistics, real wages, which are the pay after inflation effects, fell by 2.6% in November in the UK. This is one of the largest drops in growth since 2001 when comparable records were created.
Haldane stated that the UK had experienced a “lost decade and a-half in terms of inflation-adjusted pay rises” that was “putting severe financial stress and even mental stress on a large number of households”.
He said that the UK’s slow economic growth was partly responsible for the poor wages. He also criticized the UK’s insufficient investment in basic services like education and health, compared to other countries that the UK considers peers. Haldane stated that the UK seems to take adisproportionate amount of the hits on incomes and lives. This is due to the UK not investing enough in its systems, including education, health, and charity.
He said that the UK’s political instability, a “ministerial circus” to Haldane’s words, has resulted in government policy not being followed through and that there is still no “medium-term strategy for growth in this nation.”