No more good times
Even though current wage rises are negative in real terms, far too many people are still frittering their recent annual pay rise on a nice little summer outfit from Next, or yet another foreign holiday. This will not do.
Such behaviour is making it harder for the Bank to hit its 2 per cent inflation target. Inflation is currently highest in air fares to Europe (up 20 per cent from April to May) and in restaurants/hotels.
Far too many people are having a good time. We at the Bank are determined to put a stop to this. As you know, the Bank’s chief weapon is interest rate policy.
It is a clumsy tool. Nevertheless, our plan to beat the housing market into submission is progressing well, but more needs to be done.
Last summer, when interest rates were around 1.25 per cent, we quietly abolished the affordability test for mortgages whereby homebuyers had to demonstrate their ability to cope with a 3 per cent rate rise.
The affordability test was, of course, designed to protect banks, not borrowers. I apologise if the media led you to think otherwise.
Anyway, we have now ensured that banks are sturdy enough to cope with a sharp rise in delinquent mortgages while retaining their vital ability to lend to the more productive parts of the economy.
That was Stage One.
We are currently in Stage Two. With mortgages rates now back up to where they were during last autumn when former Prime Minister Truss triggered a panic attack in the gilts market and everywhere else too, we are at last starting to see fear returning to some consumers.
And not a moment too soon, say I.
Although inflation will drop markedly after July when falls in the energy price guarantee are factored in – I’m afraid this alone will not be enough to squash pay demands to keep up with the Joneses, whom I believe are off to the Seychelles. Again.
Hurting means working
Needless to say, the Bank intends to keep interest rates as high as possible until it is crystal clear that inflation has been squeezed out of the system.
That means we need to see core inflation running at less than half its current rate of
7.1 per cent.
Alas, this could take longer than you have been led to expect. We hope you understand that it is all for your own good. As former Prime Minister John Major once said: If it isn’t hurting, it isn’t working.
