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Earlier this week, the Bank of England took the correct decision and raised interest rates – with the vote going 6-3 in favour of a rise.

Unsurprisingly, the BOE’s chief economist, Charlie “the printing press” Bean, was one of the three who voted against an increase.

I have no doubt that some day the so called “doves” on the monetary policy committee – who generally vote against interest rate rises will be right – but in the last two years they have been proved wrong again and again.

Since the bank’s vote, we have also learned that:

• The RPI, a better measure of “real inflation” than CPI, rose last month.
• The Council of Mortgage Lenders has reported that mortgage lending for June 2007, at £34.2 billion is more than five percent higher than at the same time last year – in other words people are still increasing their borrowing at a higher rate than their incomes are rising – despite five increases in interest rates since last summer.
• Halifax, the UK’s biggest mortgage lender, has today raised its house price inflation forecast for the year from 4% to 6%, despite higher interest rates.

Meanwhile, in this morning’s Times, Principal Economic Commentator Anatole Kaletsky tells us to “enjoy our holidays” because “interest rates have peaked”. In a plea for fecklessness, Mr. Kaletsky writes:

“Most homeowners in Britain still enjoy a very comfortable cushion of equity in their property values and as long as this is the case they will be perfectly rational to borrow, in moderation, to go on holiday or buy a car or offset a temporary decline in real income.”

I’m sorry Mr. Kaletsky, but it is never financially perfectly rational to borrow money and spend it on depreciating assets. It is, however, an excellent recipe for wage slavery. It ensures you will have to keep working, not for your own economic advancement, but for the bank’s economic advancement.

Mr. Kaletsky writes:

“While it is true that incomes have recently fallen in real terms, the average British family is still far better off than it was a year ago because of the increase in its property, pensions and stock market wealth – and this favourable wealth effect will allow most people to keep borrowing to maintain their spending patterns, despite the squeeze on their real incomes.”

Ah, I see – the “favourable” wealth effect of a property bubble should encourage us all to continue to increase our debt and sacrifice our economic freedom for two weeks in Greece or a shiny car to boost our egos but about which no other human being could give two hoots.

Mr. Kaletsky is also wrong about further rises in interest rates. Interest rates will rise again – and not just because of continuing inflationary pressures from within the UK. Sooner or later, China will revalue its currency. The renminbi has been too low, for too long. Surging exports of Chinese manufactured goods, partly on the back of the undervalued renminbi have played an important role in keeping British (and most of the developed world’s) inflation and interest rates low.

When the renminbi is revalued upwards, Chinese goods will cost more, increasing inflationary pressures in the British economy. Make no mistake, the long term prognosis for inflation and interest rates is upward, not downward.

This entry was posted on Thursday, July 19th, 2007 at 9:02 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.