An economist who used to manage government debt at the UK Treasury says that underlying the Bank of England’s increase in interest rates is Britain’s heavily indebted economy.
The comments by Dr Paul Mills follow the decision of the Bank of England to increase interest rates to 4.25%, from 4%, in an attempt to slow rising prices. Yesterday, official figures showed that inflation unexpectedly shot up in February to 10.4%.
“The Christian response should be to look at the underlying causes of this”, Dr Mills told Premier Christian News.
“Having a highly indebted economy, having a banking system that's over indebted and over leveraged, having a government that's over indebted. We are addicted to having inflation, to get rid of some of that debt. And so there's an underlying problem.”
In his response to the rate rise, Bank of England governor Andrew Bailey said he did not think the current turbulence in global banking was likely to be a re-run of the 2008 financial crisis.
"I think we've got a banking system that is safe and sound and of course, it's one that people can rely on”, he commented.
His analysis is shared by Paul Mills, who used to be at the International Monetary Fund, the IMF, where he worked on global financial stability issues and the U.S financial system:
“The Bank of England will have information about banks in the UK under stress, because of what's going on in America and Switzerland. This raising rates now is a sort of sign that they're not as worried as they might be”, Mills told Premier.
“In terms of deposit outflows from the system, if that was going on, they might not have raised rates. But to continue raising rates at this point suggests that they're relatively confident about what the banks are seeing on the ground.”
One week ago, Chancellor of the Exchequer Jeremy Hunt presented a Budget with plans for growth, with Britain presiding over the slowest growing of all the advanced economies. A recession is projected to be avoided in 2023. But according to Christian analyst Dr Adrian Pabst, who is Deputy Director at National Institute of Economic and Social Research, half of all UK households will have lower living standards than two years ago — a loss of up to £4,000 per family.
“For people particularly in work, wages are not rising as fast as inflation”, Paul Mills continued.
“Inflation tends to hurt those who have less bargaining power in the labour market to raise their wages. But also anyone on fixed incomes, who are receiving a fixed pension that isn't index linked, they're obviously suffering a lot.”
“If you have savings, if you can get index linked, pay or pensions, then you're obviously protected”, Mills added.
“So high inflation tends to have this disproportionate effect on those who have less power in the workplace. You need to control inflation, because if you let inflation continue, it hurts the poorest the most.”
