Huw Pill wants bank base rate to rise, but what exactly would that achieve? – Murphy

However, I am increasingly struggling to understand Huw Pill’s apparent determination to push bank base rate (BBR) higher in the current environment.

To be fair to the Bank of England’s Chief Economist, he has certainly been consistent, having voted for an increase from 3.75% to 4% at recent MPC meetings, while continuing to argue such a move would send a clear and unambiguous message that the bank remains determined to tackle inflation.

But consistency does not necessarily make you right, particularly when so much has happened over the intervening months, and when the mortgage market and consumers are already living with significantly tighter financial conditions than they were earlier this year.

Mortgage borrowers have already had their rate rise

This seems to be the part of the equation that is being overlooked, because while BBR remains at 3.75%, mortgage rates certainly haven’t remained where they were earlier this year, with swaps having risen considerably as markets reacted to events in the Middle East and the resulting impact on oil, gas and energy prices.

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Average two-year fixed mortgage rates that could be secured at around 3.7% in February are now more likely to be around 4.6% or 4.7%, depending on borrower circumstances and loan to values (LTVs), which means those refinancing or purchasing are already dealing with borrowing costs around one percentage point higher.

That is not some theoretical tightening of financial conditions that might happen at some point in the future, because it is happening right now and borrowers securing mortgages today are already paying considerably more each month as a result. Even as I write today, a headline popped up on my news feed saying major lenders were upping rates again.

So, when Pill talks about the need for an increase in BBR, my immediate question is what exactly does he think has been happening to borrowing costs during the last six months?

What exactly would a higher BBR change?

There is, of course, an important distinction to make here, because Pill is not suggesting increasing BBR will somehow bring down the price of oil or gas directly, but rather, that he is concerned these external price shocks could become embedded within the wider economy through wages, prices and inflation expectations.

That is a perfectly legitimate concern, but there surely has to be sufficient evidence of those second-round effects before deliberately adding further costs to households that are already dealing with higher mortgage rates, higher energy costs and wider cost pressures.

As the bank itself has acknowledged, monetary policy cannot influence energy prices, while Governor Andrew Bailey has repeatedly highlighted the limits of what Threadneedle Street can do about geopolitical events, because the MPC cannot change what is happening between the US and Iran, reopen the Strait of Hormuz or bring wholesale gas and oil prices down.

Increasing BBR to 4% would achieve none of those things, but what it can do is increase payments immediately for tracker borrowers, potentially feed through into standard variable rates (SVRs) and place further pressure on mortgage pricing and household confidence.

Does anyone doubt the bank is serious about inflation?

Pill has also argued that an increase would provide a clear signal of the bank’s determination to tackle inflation, but I’m not entirely sure who needs that particular message sent to them.

We all know the bank has a 2% inflation target, we all know controlling inflation is its central responsibility, and mortgage borrowers who have lived through the rate increases of recent years certainly do not need reminding that the MPC is prepared to increase borrowing costs when it believes this is necessary.

Indeed, perhaps the clearer message from an increase now would be that some MPC members are prepared to impose further costs on households in response to inflation whose primary causes sit well beyond the bank’s control.

There is also something rather odd about consumers potentially being hit three times by essentially the same external shock; first, through higher energy costs, secondly, through higher mortgage pricing as swaps react to those pressures, and thirdly, through an increase in BBR designed to tackle the possible consequences of those same pressures.

More ‘consumer’ heads should prevail

The MPC meets again this week and, while nobody should be complacent about inflation, the facts of the matter are that our price shocks are coming from external sources, shipped into our domestic economy. I would therefore hope the majority of MPC members continue to recognise the tightening that has already taken place and the limited, if any, impact raising BBR will have on these outside inflationary pressures.

Pill has been consistent in wanting BBR increased, and he is perfectly entitled to maintain that position, but the world has not stood still while he has been making the argument, and neither have mortgage rates, household bills or the financial pressures facing consumers.

Sometimes sending a clear message is less important than recognising what is already happening in the real world, and right now, I struggle to see how making mortgages and other borrowing even more expensive tackles the root cause of today’s inflation or what is driving it, rather than simply adding further pain for consumers who are already paying the price.