Osborne Braces for Cost of Living Angst as Rate Views ShiftSvenja O’Donnell
Chancellor of the Exchequer George Osborne might struggle to persuade recession-weary Britons that paying more for their mortgages would be a good thing.
Voters squeezed by soaring energy bills and stagnant wages now face the threat of costlier loans as the strongest growth since 2007 fuels speculation that the Bank of England might raise interest as soon as this year. Governor Mark Carney and his policy makers will meet today to discuss the strength of the economy in preparation for their monthly decision next week.
While Carney promises no increase for now, he says officials won’t hesitate do so if needed before the May 2015 election. For Osborne and Prime Minister David Cameron, that prospect risks stoking the political debate over living costs that has given the Labour opposition a lead in opinion polls. Labour says ordinary voters aren’t feeling the recovery.
“People have got used to a long period of flat interest rates for their mortgages and any credit-related purchases,” said Mark Wickham-Jones, professor of politics at Bristol University. “Voters tend to hold the government to account for that sort of decision even though it’s the Bank of England’s decision. It will make the Tories nervous.”
Investors maintained bets on a pre-election rate increase this week after government figures showed the economy grew 1.9 percent in 2013, the most for six years. Every industry except construction advanced in the fourth quarter.
‘Way to Run’
Asked in a Channel 4 interview on Nov. 13 whether he’d be prepared to raise interest rates before an election, Carney replied “absolutely,” saying that when he ran the Bank of Canada he cut rates in the run up to the 2008 federal election.
For now, the economy has “some way to run” before officials move away from emergency stimulus, he said in Scotland two days ago. The MPC is expected to take no action on rates this month, according to all of the economists who have so far submitted forecasts to a Bloomberg survey.
At their “pre-MPC meeting” officials will be briefed by BOE staff on recent economic developments. They will start their two-day policy discussion on the afternoon of Feb. 5 and announce their decision at noon the following day. The bank will publish new forecasts in its quarterly Inflation Report Feb. 12.
Bank of England figures help to explain the challenge facing Osborne and Cameron as they seek to persuade voters to accept higher interest rates as the price of a return to economic normality.
According to the central bank, a fifth of U.K. mortgage debt is held by households borrowing more than five times their income. It also estimates that if incomes fail to grow, a 2.5 percentage-point increase in interest rates could force half of indebted households to work longer hours or cut spending to afford their repayments.
“People who are hurt from rate rises are much more sensitive to levels of income,” said Andrew Hawkins, a pollster with ComRes Ltd. A rate increase “could be very damaging politically. It’s the people in suburban areas, people who voted for Tony Blair, these are the people for whom cost of living is a big issue.”
Citigroup Inc. forecasts the BOE benchmark, which has stayed at 0.5 percent since March 2009, will rise in the fourth quarter and reach 2 percent by late 2015.
The Treasury said that any future increases in interest rates needed to be seen as a sign the economy was recovering. Recent polls show Labour’s lead over the Conservatives narrowing to as little as four percentage points, the lowest in a year.
The argument over the cost of living was rekindled today as new research claimed that Britons are five years away from seeing their living standards return to pre-crisis levels, with the poorest on course to be the biggest losers.
The report by the Institute for Fiscal Studies shows that while the fall in household income has probably come to a halt, living standards are still 6 percent lower than before the 2007-08 crash. The prospect of further cuts to welfare may add to the squeeze on the least well off, who have been hit hardest by inflation, the IFS said.
Government figures published separately today show real wages have fallen by 2.2 percent a year since the start of 2010, the longest decline since records began in 1964.
Osborne, who during his early years in office defended his austerity program by stressing the need to hold down borrowing costs, signaled a shift of tone last week when he welcomed news of the biggest drop in unemployment since 1997 as a “measure of success.”
In a sign of frustration over the headway Labour has made with its claim that there is a “cost-of-living crisis,” the Treasury published analysis last week showing that nine out of 10 workers saw their wages rise faster than inflation over the past year once tax cuts are taken into account. Labour disputed the figures.
Conservative claims that their austerity plan is working “are not going to wash with working people who are seeing their living standards falling and for whom this is no recovery at all,” Labour treasury spokesman Ed Balls said this week.
With the economy gaining strength -- the International Monetary Fund raised its 2014 growth forecast to 2.4 percent last week -- the need for higher rates will become harder to ignore, according to James Knightley, an economist at ING Bank NV in London.
“The first increase may come as early as this year, as it would harm the MPC’s credibility to continue to ignore the signs of recovery,” said Knightley. “The chancellor may need to come up with some sort of fiscal giveaway to compensate, such as lower taxes.”