When will the Bank of England learn?

The Bank of England (BoE) increased the interest rates last week to 5.5%.  Is it enough to slow the average UK consumer’s lust for debt, and love of shopping – hardly.  This is according to several economic analysts, and the BoE who plans to increase the rate again this year, with a target of 6%.

That is what happens when the rich kid grows up and daddy kicks them out of the house.  While most UK adults would never believe that they’ve experienced several decades of wealth, the rest of the world still looks on and sobs with envy.

Retail analyst Richard Perks tells Bloomberg:

"There has been a fundamental shift in the attitudes of U.K. consumers because we’ve had such a prolonged period of strong growth. People want to spend. I don’t think a quarter-point rate increase is going to change that."

These ‘grown up kids’ don’t get it – yet.  There is nothing left in the trust fund.  Daddy’s allowance has stopped. The well is dry.  You can’t continue spending with no regard for the consequences.  Of course, no one is listening.

Cry wolf and eventually people will stop listening. That is what happened.  In 1997 they cried wolf, and look what happened.  A couple hard years and the UK’s economy was flying again.  This time, they have been crying wolf for about five years. Every year they say the same thing, everyone is going bankrupt, you’ll lose your home, you’ll lose your job.  A threat that is kind of hard to swallow with people earning unprecedented wealth from the sale of their homes, City bonuses, and a ‘get out of free’ card to play for those who are not shy about bankruptcy.

What is everyone worried about? The Bank of England is terrified that their inflation rate rose above the 3% level.  Ask China, after a few minutes of confusion they would break out laughing at an inflation rate jump that they might experience in a matter of hours.

However, homeowners are not laughing over the recent interest rate hike, nor the proposed hikes that could see the interest rate increase to 7%.  What the homeowners want to know is why they are being gouged.  Yes, there is an inflation rate – there is also a housing boom.  There are also increased costs of imports from countries like China who really are suffering under the burden of a high inflation rate.

Does the Bank of England really believe that making it harder for someone to own a home is going to slow the inflation rate?  Maybe they are hoping to drive a few hundred thousand middle class homeowners into bankruptcy.  That will definitely slow the UK’s spending rate for a year or two.

So, either our government are crazy, or most of us do not really understand what the point is.  To understand, you need to look at the bigger picture.  Less money in the consumer’s pocket means less money in big industry’s pocket.  Do that and they start to drop prices.

Don’t believe me?  Did you see a decrease in your electricity bill?  Maybe not, but the decrease was big enough nation wide to shave 2% off the inflation rate.  The hydro companies are not complaining, their profits have exceeded their analyst’s predictions. 

Of course, when the inflation rate is down, people are not bugging their bosses for more wages.  That keeps industry happy.

There have been other slows in inflation in the industrial section.  What you need to understand is that the large corporations owe more than some small countries.  Their debts, and the impact of higher interest rates, are enough to force them to appease the Bank of England by lowering prices, or slowing their price increases.

What does this mean to the average person? People who spend hundreds of pounds on their credit cards without repaying it, or who want to own a home, will find the increases in interest rates hard to stomach.

If this is all confusing you, don’t worry. The BoE is scratching their heads too.  When the inflation rate increases then people are suppose to stop spending.  That is how it has always happened. When bankruptcies increase, the rest of the population starts cleaning up their finances.  That is tradition.  It is what has always happened.

What went wrong?  Nothing, at least, not as far as the UK population is concerned.  Face it, they created a unique form of capitalism that is not matched in any other country. The USA tried to follow, and are now suffering a housing problem.  It is one of those things that is inherent to a culture.  You have to be a Briton to ‘get it.’  Or, maybe to ‘not get it’ depending on which side of the argument you are standing on.

The argument is currently ‘do we increase interest rates alone.’  Unfortunately, it should be, ‘if it works – why mess with it.’