Last week, the Bank of England engaged its proven interest rate lever for the 14th consecutive time. adding more suffering to an ever smaller group of mortgage holders.
In doing so, Gov. Andrew Bailey has shifted the brunt of his drive to curb inflation, which he admits is still too high, onto young homeowners. .
The Bank's rate-setters raised borrowing costs by more than five percentage points in the most aggressive round of increases since the 1980s.
However, two years after inflation suddenly started to rise, it is still at 7.9%, almost four times the Bank's target of 2%.
This has led to warnings that that raising interest rates is becoming «less effective,» as Michael Saunders, a former member of the Monetary Commission, noted. Policy Committee.
People like Saunders fear that the Bank's only tool to fight inflation has been blunted by rising intergenerational inequalities.
This means more hardship for households due to skyrocketing prices, and rates should stay high for longer.
0608 Rising rates
Thorsten Bell, head of the Resolution Foundation, says: “We have fewer homeowners. This is due to the fact that by the age of 30 the share of homeowners in the younger generation is half that of the older generation.
Data from the Office for National Statistics (ONS) show that about 4.9 million adult children lived with by their parents in 2021, up 15 percent from 4.2 million ten years earlier.
The Office for National Statistics said the rising numbers reflect less affordable housing and appeared to be «an ongoing trend, not the result of a pandemic.»
Over the same period, rents and home prices rose at record rates, far outpacing sluggish wage growth fees.
More seniors than ever before are also wholly owning their homes, meaning they won't be affected by the rate hike.
“There are fewer people who have mortgages among homeowners,” says Bell. “We have cohorts of older people who own property entirely on a scale never seen before, sometimes owning multiple properties.”
0608 More older children live with parents
2021 Census data showed that one in three owns his house. For the first time, this share exceeded that of mortgage loan holders and tenants.
Bell says this is the result of falling borrowing costs over the past three decades and driving house prices up.
Economists call the impact of interest rates on the economy a «transmission mechanism».< /p>
In a vicious circle, growth rates, at least in the short term, fuels the very intergenerational inequalities that have already helped make them less efficient.
The most obvious consequence of this is rising borrowing costs, which makes it impossible for many new buyers to own property before prices eventually drop enough to restore affordability.
Landlords who raise or sell rent because of higher mortgage payments are also putting pressure on those who are still renting. , making it even more difficult to collect a deposit to buy a house.
Savings matter too. People aged 65 to 74 have more than five times more interest savings than people aged 25 to 34: £57,000 and £11,000 respectively.
«You have people getting income growth from higher savings rates, which will increase spending, while rising mortgages will hit people's incomes, which will lead to lower spending,» says Bell.
< p> Higher borrowing costs «will still be a net brake on the economy, but it will take longer and [the transmission mechanism] is probably a bit weaker than in the past,» he says.
0608 Average balance for age
Saunders, a former rate-setter and now a senior adviser at Oxford Economics, agrees that increased savings have reduced the ability of rate hikes to quickly suppress inflation.
He said that 15 years ago, debt was about 40% more than interest-bearing assets such as bank savings, but this has changed dramatically now.
“Now debt and interest-bearing assets are about the same size,” he says. “Thus, the reduction in household income due to higher interest rates is less, and the increase in the income of savers is greater.”
Thus, changes in interest rates “have much less impact on consumer spending than before.”
p>
Even before inflation soared, millennials and Gen Z were already facing higher house prices and stagnating wages.
But Marcin Bielecki, an economist who has studied the impact of monetary policy across generations, says that young people who entered the labor market in the last five or ten years are now facing another bout of failure.
< p>«If they had been born 10 years earlier, they would have become homeowners, at least most of them,» he says.
«Unfortunately for this generation, they have suffered from this one of the worst sequences of shocks. First, they were asset poor at a time when asset prices were rising, and now they will face a tightening labor market.”
0107 House price versus income
High interest rates tend to force unemployment as companies whose debts are overwhelmingly variable interest rates cut back on hiring to pay for higher borrowing costs.
Despite unemployment in The UK is still close to a historic low, having risen from a low of 3.5% to 4% over the past year.
Another significant non-generational change that weakens the ability of the Bank of England to fight inflation. The decline in variable-rate mortgages is conditional.
The vast majority of mortgages ten years ago were issued with floating interest rates, and now they are only 12.5%.
Striving win over younger voters, ministers are considering making regulatory changes to encourage more lenders to offer 40-year fixed-term mortgages.
Andrew Griffith, economic secretary at the Treasury Department, said he was «definitely interested» in the idea.
This despite the fact that just a month ago, the prime minister admitted to MPs that the transmission mechanism had slowed due to for more people with short-term, fixed-rate mortgages.
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The Bank of England also warned on Thursday that its ability to curb inflation could be weakened by «remortgaging» if more households will extend its mortgage loans.
Saunders says: Until 15 years ago, high home ownership and lower savings, the economy would have already slowed much more sharply because rising interest rates would have taken a bite.
He adds: «Most likely, the economy has already were in recession. Interest rates may still not be rising because monetary policy would have worked more quickly and effectively.”
Until now, the UK has narrowly avoided a recession, with large numbers of people still eating. and job losses are low.
“The economy has held its own, which at first glance sounds like good news,” says Saunders. “But the downside is that inflation remains stubbornly high.”
The economic result is that higher interest rates still help tame inflation, although the impact is getting weaker and slower.
Politicians should be warned though, as they will find that this will only increase the suffering of a declining portion of the population.
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