To: The Monetary Policy Committee
Bank of England
Threadneedle Street,
London EC2R 8AH
THE PITFALLS OF HIGHER INTERST RATES:
Higher interest rates can be useful for slowing or reducing inflation in the short term but this is not the correct or ideal solution:
“Raising interest rates can cause inflation and currency depreciation” is an argument has been documented in the Journal of Applied Economics [2020, vol 23, no 1, 450-468] in a paper by Jon Helgi Egilsson.
The higher costs of production [higher interest /borrowing costs] and prices of export of goods will add to inflation unless it is counteracted by lower wages of other factors of production. It is unlikely that lower wages are going to be acceptable in the current economic and political climate, especially when there is inflation. The impact of production costs will also make goods uncompetitive relatively [locally & globally – unless the currency depreciates]; business viability and growth will be threatened or thwarted. Business growth is necessary and needed in times of recession and upheavals.
On the domestic front the impact on home owners will be huge with mortgage interest and repayments costs more than doubling, or even tripling in some cases. This will cause grave hardship to most home owners. With no significant reduction in the prices of goods and services it will force people to sell or rent out their homes or/ & compromise their lifestyles dramatically. Social strife is already existing in many sectors in UK.
Macro-economically, UK has a high government debt of 99.6% of GDP, this is slightly higher than the EU average, though slightly lower than the G7 average [with USA and Japan being higher]. Higher interest costs mean higher borrowing costs to the Government too.
Further hikes in interest rates can be damaging to the economy, the consumers and social stability.
A small reduction in rates now would be helpful.
Prof. Naresh Sethi, MBA, FCCA 62A Pembridge Villas, London W11 3ET
9th October 2022.
www.nsethi.com