This Morning: Martin Lewis gives advice on interest rates
The Bank of England has come under fire after it raised the base rate to three percent in a bid to bring down inflation. Britain’s central bank has also said gross domestic product (GDP) could shrink for every quarter for two years, with growth only coming back in the middle of 2024.
Thursday’s rate rise announcement has prompted criticism of the Bank, Prime Minister Rishi Sunak and Parliament’s Treasury Committee.
Sir John Redwood told Express.co.uk: “According to the Government and all the political parties, the Bank is independent and responsible for keeping inflation to two percent. Inflation is currently at 10 percent. The Bank has failed badly on inflation, which harms our economic prospects.
“The constitution of course makes the Governor of the Bank report to both the Chancellor and to Parliament. Chancellors have private review meetings with the Bank and Parliament summons the Governor to be questioned by the Treasury Committee. Presumably, these contacts are designed to influence and criticise the Bank, otherwise they are a waste of time.
“The structure recognised the Bank might follow bad policies which could lead to too much inflation. If that happens the Bank has to send a public letter to the Chancellor and Parliament explaining why and setting out how they will handle the problem. The Chancellor then sends back a public letter commenting on the Bank’s approach. The exchange of public letters allows for private exchanges to agree on a common line. The Treasury Committee Chair could institute a review of the Bank failure.”
The Bank of England is under fire after it raised Bank Rate
Prime Minister Rishi Sunak on the steps of 10 Downing Street
Rishi Sunak’s promises from the Tory leadership race are all on the table, Downing Street has said. No 10 today refused to commit to any of the new PM’s pledges during the contest over the summer.
What does this mean for the UK and our economy? Find out more HERE.
Sir John continued: “On September 22 2021, the Governor wrote the first of a long series of letters reporting faster inflation.
“He reported inflation above three percent, forecast a further rise to four percent, said it would be temporary and proposed doing nothing about it.
“The Chancellor, Mr Sunak, wrote back agreeing to inaction. Neither letter writer referred to the excessive money printing and ultra low rates that some of us thought likely to trigger inflation. They preferred to blame companies and markets for the price rises.
“The Bank was clearly wrong and did not listen to those of us who said don’t carry on printing money and buying bonds. The Chancellor could have insisted on a change of policy in private or sent a more critical and tougher letter in public. The Treasury Committee could have woken up and led a public enquiry into the Bank’s policy failure. Is 10 percent inflation the nearest an independent Bank can get to a two percent target?”
The Bank of England, Treasury Committee and Downing Street have been approached for comment.
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A view of the City of London
A woman shops at a market stall in Slough
In July 2021, the House of Lords’ Economic Affairs Committee published a report which warned the Bank had become addicted to quantitative easing, where the Bank effectively prints money to buy bonds in a bid to lower interest rates on savings and loans.
Lord Forsyth of Drumlean, Chair of the Economic Affairs Committee, said at the time: “The Bank of England has become addicted to quantitative easing. It appears to be its answer to all the country’s economic problems and by the end of 2021, the Bank will own an eye-watering £875bn of Government bonds and £20bn in corporate bonds.
“The scale and persistence of QE—now equivalent to 40 percent of GDP—requires significant scrutiny and accountability. However, the Bank has faced few questions until now. Going forward, the Bank must be more transparent, justify the use of QE and show its working.”
Bank Governor Andrew Bailey warned Britons on Thursday that the road ahead would be a tough one.
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A chart showing interest rate rises in the UK
Mr Bailey added: “We do understand the difficulties of the situation we’re in and the difficulties mortgage-holders face. If we don’t take action to get inflation down, things will get worse.”
There was better news in the Bank’s inflation projection. It had previously forecast inflation peaking at 13 percent in the third quarter of this year, but with the Government’s support on household energy bills, the forecast was slashed to 10.9 percent.
But the Bank warned in its latest forecast that from its highest to lowest point, GDP is expected to drop 2.9 percent compared with 6.3 percent during the financial crisis.
The Government has said its energy support scheme – which currently caps bills at 34p per unit of electricity and 10.3p per unit of gas – will be reviewed next April, instead of running for two years as previously planned.
Assuming some support will remain in place for the full two years – albeit half as generous from April next year – the Bank forecast that inflation would drop to 5.25 percent next year before dropping to 1.5 percent in 2024.
A view of the Bank of England building in the City of London
Meanwhile, major infrastructure projects, including a major high-speed rail line in northern England, are being reviewed as Mr Sunak tries to find £50billion in savings and tax hikes to plug a black hole in the nation’s finances.
Business Secretary Grant Shapps has hinted Northern Powerhouse Rail between Liverpool and Hull would be scaled back, as Downing Street denied it would be scrapping a commitment to build a new nuclear plant in Suffolk.
Concerns Sizewell C could be axed or delayed were sparked by suggestions from officials, but No. 10 insisted it is a “crucial” project and it hopes to conclude negotiations quickly.
Chancellor Jeremy Hunt and the Prime Minister are looking for sweeping cuts ahead of the November 17 budget.
The manifesto the Conservatives won the 2019 election on promised Northern Powerhouse Rail between Leeds and Manchester.
Former Bank of England Governor Mark Carney doubled down on his claim Brexit would add to inflation and devalue the pound, arguing it “hasn’t recovered” since the sharp drop after the EU referendum.
He told the BBC he had forecast the exchange rate would stay down, adding to inflationary pressure, and that the economy would shrink “which is the situation we have today where the Bank of England has to raise interest rates despite the fact the economy is going into recession”.
Downing Street, however, insisted the economic challenges have been caused by the coronavirus pandemic and Vladimir Putin’s war in Ukraine, declining to comment on the affect of Brexit.
The official spokesman said: “Our focus is on ensuring we have stability and fiscal credibility. That’s what the Chancellor and the Prime Minister are focused on rather than on a decision taken a number of years ago where people made a clear decision.”