Friday, 4 July 2014

Beware the ‘London bubble’ which threatens to de-rail our recovery

Responsibility for interest rates has formally been the responsibility of the Bank of England since 1997. Although the potential for politics to interfere with economics was undermined from the time that the Bank of England’s ‘guidance’ to the Chancellor was published well before that change, nobody would suggest that any change be made to the current arrangements.

On the other hand, few would envy those Monetary Policy Committee members their current task. We have a recovery which is gaining stronger momentum every day, but the dangers to recovery are still present and very real. The path to securing the effective management of our debts – both public and private – whilst restoring a calm, steady growth requires the wisdom of Solomon.

After the longest period of ultra-low interest rates, it is reasonable to assume that the next direction will be upward in nature. Savers have been penalised especially hard as the squeeze between high inflation and low interest rates have devalued the pots of money carefully put to one side. Those who elected to consume tomorrow’s wealth yesterday – including the previous Government – are left teetering on the brink of even more pain when the inevitable interest rate rise occurs. And before we get too carried away with the confidence of growth, we should not forget the debt overhang which still affects us all and will need carefully to be managed.

In that scenario, it is not surprising that speculation is under way about when interests might rise and to what extent. And as house prices in London and the South East spiral yet further beyond the reach of those earning relatively impressive salaries, the pressure to raise interest rates acquires a fresh poignancy: even appearing to some to be an emergency requirement to calm the acceleration in house prices down.

We hear the Governor of the Bank of England sucked into an almost daily commentary about what will happen. He accepts that interest rates are set to increase, and seems to toy with us about what we should expect. But I worry that his efforts to be helpful might backfire badly. Given the precipice upon which we stand, even small changes in interest rate policy could have major consequences for those with relatively high levels of debt or those making housing market decisions. The uncertainty which his interventions in response to more general speculation may be creating a wave which could drag us back into recession.

But a major thrust of the recovery is to re-balance the economy – with regions other than London and the South-East spearheading the march to growth. In Northamptonshire, we have certainly stepped up to the plate with an ambitious and pro-active Local Enterprise Partnership. Housing growth is a key part of the future for Northampton, and the Northampton Alive project has driven a regeneration agenda which has placed us firmly on the economic recovery map. And from our perspective, just a short distance up the M1, the economic conversation is quite different from that dominating Governor Carney’s agenda.

I do not envy Governor Carney in the exercise of judgement which he and his team of economists will have to make in the coming months, particularly in deciding how, when and by how much to change interest rates. But there is evidence of a bubble which does cause me some concern: and it is focused on London. Businesses and households need some degree of certainty in making their plans, and a long-term managed approach – such as a gradual increase in interest rates with further guaranteed stability for a period of five years or more – is essential. But in seeking to ‘burst the bubble’, I hope that all of these clever people will avert their gaze away from our capital city for just a few moments to realise that the needs beyond are quite different and have yet fully to be taken properly into account.

1 comment:


    The United Kingdom has a 2 speed economy with a feeble recovery, 'based on shallow and weak foundations' – so says Neil Woodford highly respected investment guru. He has been quick to rebuff any notion that the UK’s economy is on the mend.

    ‘Markets have risen across the board mainly thanks to the stimulus from the central banks in the form of quantitative easing over the past few years. Exports are low and investment is falling, and without investment, wages won’t grow.’ The 'consensus mistake', he warned, is to expect interest rates and bond yields to rise soon. They won’t, according to Mr Woodford. Interest rates will stay lower for longer, perhaps for another two to three years, which is not what most people are anticipating.

    Read more:

    Firstly there is the ‘London bubble’ which is fuelled by a shortage of affordable housing causing it to over-heat and which has been unhelpfully stoked by Osborne’s Help-to-Buy Scheme. Secondly there is THE REST OF THE UNITED KINGDOM which is suffering from a sluggish economy at best, falling inflation, depressed wages with still a great deal of ‘slack’ in employment figures which is never going to improve whilst high levels of immigration continue! But of course open borders is an EU policy so it is highly likely that the existing problems could continue for several years whilst we have a CONLIBLAB government wedded to EU policy.

    Across all areas, extremely high/record levels of both private and public debt exist, even after the longest historical period of ultra-low interest rates. This Coalition government, following on from where Labour left off, has continued to add to public debt and has stimulated private debt in the guise of excessively high mortgage loans. There is insufficient real growth, corporate investment, or inflation in the present economy to eat away at debt levels and so they will persist indefinitely.

    Further down-beat prognosis comes from Moritz Kraemer who is Chief Sovereign Rating Officer at Standard & Poor’s Ratings Services who says, ‘The fragile economic recovery in the Eurozone is likely to remain subdued in the medium term, and this is reflected in our sovereign ratings. Moreover, if recovery expectations disappoint, this could exacerbate political polarisation, and thus pose an increasing threat to sustaining growth-enhancing, but often unpopular, reforms. Without a swifter economic recovery and growth in employment, popular dissatisfaction could swell. But ultimately, growth will remain dependent on net export performance, as domestic demand will face continuous headwinds. With the deleveraging process in the Eurozone periphery barely underway, efforts to reduce the persistent debt overhang are likely to stunt growth prospects in the periphery for many years to come.’ THE EU AREA IS NOT OUT OF THE WOODS YET AND NEITHER IS THE UK!

    The eventual direction of interest rates will be upwards but not for quite some time yet and when they do turn up they will be in very small increments otherwise they are likely to tip this country back into recession.

    Mark Carney is currently playing a game of bluff with the markets; his warning recently that an interest rate rise could come before originally anticipated, possibly by this November, is purely aimed at cooling the London housing market, that is all, he has no actual intention of raising interest rates any time soon. After all the setting of interest rates for the whole of the United Kingdom cannot be governed by a London housing market ‘bubble’ so it is highly unlikely that any significant rises will be seen before the May 2015 election.