Interest rates must rise next month

Harvey Jones explains why interest rates need to rise in February...

If you’ve got a variable rate mortgage, as I have, you’ve had a whole heap of fun out of 0.5% base rates. Nearly two years of fun, in fact, far more than we could have hoped for.

The decision to slash base rates to a 316-year low has saved me (and millions of homeowners) hundreds of pounds a month, and you can have a lot of fun with that. Or at least, pay a lot of bills.

But now it’s getting a bit silly. This has gone on long enough. Interest rates have to rise. Not in the second quarter, or the third or fourth quarter, or even 2012. But next month.

I won’t like it, many of you won’t like it, but that’s the way it has to be.

Time to pull the trigger

Last week, the Monetary Policy Committee (MPC) of the Bank of England once again refused to bite the base rate bullet. This week, in an instant rebuke, shock new figures showed inflation hit an eight-month high of 3.7% in December, as measured by the consumer price index (CPI). That is up from 3.3% in November, the biggest monthly leap in living costs since records began.

Inflation is actually 4.8% if you measure it by the retail price index (RPI), which we should because it includes housing costs. And if you drive a car, take a train or eat food, you might be forgiven for thinking that inflation has hit double figures.

The Bank has only one weapon at its disposal in the battle against price rises - interest rates. So far, it has refused to use it. This can’t go on. Now is the time to lock and load, as Sarah Palin might put it.

Base rates must rise.

Something Fishy

The bad news is that inflation is going to get worse before it gets better. January’s VAT hike, the fuel duty increase and oil at nearly $100 a barrel should push CPI above 4% in February.

The Bank of England has a remit to keep inflation within 2%. Even using the doctored CPI figure, it has missed by a mile. Inflation has been above target for 13 consecutive months.

The Bank persists in claiming that current high inflation is just a blip, and it will retreat in a year or so. Trouble is, its reputation as a forecaster is right down there with The Met Office. I would sooner ask Michael Fish where inflation will be in 12 months’ time than Bank of England Governor Mervyn King.

Perhaps Mr King can tell us whether we will have a barbecue summer.

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Credit where it’s due

The Bank was dead right to slash base rates to pieces. It spared us a much nastier recession, with even more company closures, job losses and repossessions. It may also have prevented the economy from sinking into a vicious deflationary spiral.

But now it is in danger of taking it too far.

Hugged to death

Rising inflation puts the squeeze on all of us, but it has savers in a bear hug. A basic rate taxpayer needs to earn 4.63% gross on their savings just to keep pace with inflation, or 6.17% if they are a top-rate taxpayer.

It can’t be done, which means their money is falling in value every year. If you had £10,000 in a savings account paying 0.2% (the average return, unbelievably!), inflation cost you £331 last year.

Raising interest rates would offer savers a glimmer of light at the end of a long, dark tunnel. It will take more than one hike to see them through to the other side, but it would be a start.

Inflation hurts pensioners most of all, because they spend a greater proportion of their income on essentials such as food and heating, where bills have risen fastest. And it hurts almost everybody in work (bankers aside), because pay rises aren’t keeping up.

High wire act

Raising base rates is a blunt weapon. It won’t reverse rising oil or grain prices, and it won’t repeal that VAT hike either. But it will show that the MPC recognises the inflationary threat, and is prepared to take tough action where necessary. If it doesn’t act next month, its credibility will be shot to shreds.

The Bank is walking on a tightrope, wobbling between the twin towers of deflation and inflation, and it can’t afford the slightest slip-up. But a small base rate rise isn’t going to plunge us into the abyss.

What it will do is send out a message of hope to savers and fire a warning shot across the bows of borrowers, in case they are beginning to think that rock bottom base rates will last forever.

Base rates don’t bite

We need a base rate rise next month, even if it costs me, you, and millions of others a bit of cash. If you have a £100,000 mortgage, raising rates by 0.25% will cost you £21 a month. In the longer run, that might be a price worth paying.

By acting now, the Bank of England could spare us more dramatic base rate rises in future. The economy desperately needs rates to stay low. Raising them may be the best way of ensuring they do.

If you’re a homeowner, you might disagree. But c’mon, you’ve had it sweet for nearly two years. Now it’s savers’ turn. We only need a teensy-weensy little base rate rise. A wafer-thin rise. Just 0.25%. Next month. Please.

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