Sky’s Ed Conway said a thinktank report highlights an unusual phenomenon for the UK economy although many will not feel the real benefits.
Via Ed Conway, economics and data editor @EdConwaySky
Friday, January 5, 2024 00:02, United Kingdom
Here’s a sentence that might sound a bit odd: higher interest rates are good news for the UK economy.
For the first time in decades, pain is being faced by borrowers from superiors interest rate has been further balanced by the benefits savers receive from those interest rates.
If this sounds a bit odd, it’s partly because when people – the media, politicians and economists – talk about interest rates, they focus excessively on one side of the equation: the plight of borrower. And there is an understandable reason for that: during previous “hiking cycles,” when Bank of England increases interest rates, that pain is always greater than what God gives.
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That was the case when interest rates were removed in 1988; That was the case in 1996, 2003 and 2006.
In each case, the overall impact is worldwide economyon the household’s balance sheet is negative.
But this time it’s not like that.
According to the Resolution Foundation, the net income we earn across the economy from interest rates has actually increased rather than decreased – up one percentage point since interest rates began rising.
To put that into perspective, the “interest rate effect” on earnings in the late 1980s was -1.5 percentage points.
And it’s worth noting that when you compare the UK with the eurozone and the US, we’re a little bit different: the interest rate effect, across the entire economy, is much more positive than in the two zones. remaining area.
According to the Resolution Foundation, this is at least part of the reason why the UK has not yet fallen into the recession that many were predicting this time last year.
Part of the reason for this is that it happened, largely because of the pandemic lockdown, which caused people to start this hiking cycle with a lot of savings in their bank accounts – more than usual.
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The end result is that, across the economy, the benefits from those savings (and savings rates are rising very quickly – although not yet to the level of borrowing rates) outweigh the impact on Mortgage and loans. Another part of the explanation is that only about half of people with fixed-rate mortgages have so far re-fixed their loans.
But there are some very important terms here. The first and perhaps most important is that while the above is certainly true across the economy, there are still significant differences in experiences between different groups of people.
Those with debt greater than their savings (in this case mainly younger people) will certainly see a negative impact from higher interest rates. Those with more savings than debts – the older segment of the population – will benefit. In other words, the pain and dividends are not shared equally. Older people are doing much better; Young people are doing worse.
And there are two other conditions. The first is that this positive effect will begin to fade as more and more people renovate their mortgages and move from lower to higher interest rates. Although the typical fixed interest rate has dropped recently, it is still much higher than it was two or five years ago.
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The final proviso is that none of the above takes into account the broader impact of the cost of living crisis.
Everyone pays higher prices for almost everything. And although the annual rate of price growth (inflation) has decelerated, prices are still 15% higher than they were a few years ago.
It was a painful adjustment for everyone. The good news is that the impact of interest rates – across the entire economy – is actually positive, not negative. But not everyone will see the benefits.