Meanwhile, British interest rates go up

The Bank of England today tightened the squeeze on borrowers as it raised interest rates by a quarter point to 5.75%, their highest level for six-and-a-half years.

Meanwhile, the ascendancy of the pound continues:

pound exchange

Against the US dollar, at any rate. Against ours? Not so much:

GBP to AUD exchange

Although a slight tick at the end there. The markets were expecting this rate increase and they got it. It looks like the Australian dollar is expected to be a better buy still – bad news for Australian mortgage-holders, mortgage-wanters, and election hopefuls. And Pete (sorry, Pete).

Meanwhile inflation is down, but still not at the BoE’s 2% target. Consumer spending is still strong, but with mortgages now topping 50% of incomes (for young buyers in parts of London – not surprising), and consumer borrowing getting more expensive, that should slow down:

According to research from the accountants PriceWaterhouseCoopers, Britain’s heavily indebted households are already having to set aside a record slice of their incomes to pay off their debts.

John Hawksworth, PWC’s chief economist, said that at 19% of disposable income, the cost of servicing principal and interest on debt of more than £1 trillion had topped the previous record in 1990.

All told, inflationary pressure in England is still significant – the consensus is that rates may well hit 6% before the year is out.

Explaining its decision, the BoE said that even though inflation was expected to dip in the short term thanks to lower utility bills, many businesses were working at close to full capacity and most indicators of price pressures remain elevated.

Markets showed little reaction and are pricing in further rises in borrowing costs.

Which ties in nicely with my last post. Interest rates cannot be brought down simply according to policy geared towards making housing affordable. Interest rates need to hold inflationary pressure down (moreso than usual, in the absence of adequate implementation of policies for stable long-run growth). As long as countries like Australia and the UK run at or near full employment, interest rates will tend upwards, not downwards.

Not good news for the US, of course, which needs the capital flows, but which is posting low rates of growths (still better than the alternative) and is not near full employment at all. They also have inflationary pressure, predominantly oil-price-driven, but have an economy to try to move along, also. It looks like other currencies will be a better investment for the time being.

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