BIG BUSINESS, the stockmarkets and the TUC were shaken yesterday midday when the Bank of England raised its interest rates by a quarter of one per cent to 5.25 per cent.
Commenting on the decision, TUC Head of Economics, Adam Lent said: ‘Today’s decision smacks of panic rather than considered judgement.’
The CBI bosses organisation added ‘It is disappointing that, with only tentative indications about the outcome of the wage round, the Bank has already decided to increase interest rates. If part of the intention was to dampen wage increases, it is doubtful a rate rise will have the desired effect.’
The odd man out was the Institute of Directors. It said: ‘This was a tough but wise decision. The MPC needed to stamp down on inflation given the upside risk at present. Inflation is well above target, spare capacity is low, money supply growth is high and the housing market looks perky. Throw in on top the risk of accelerating wage settlements and the Bank of England’s pre-emptive strike looks sensible.’
The Bank of England pointed to consumer price inflation rising to 2.7 per cent, and the expectation that it will reach 3 per cent next week, while the RPI inflation rate, including mortgage interest rates was 3.7 per cent.
The reality is that the UK economy is massively in deficit while the indebtedness of the population is huge and growing rapidly.
With the US housing and industrial market in rapid decline, the UK’s trade deficit in goods and services rose in November to £4.7bn from £4.1bn as imports soared.
While the surplus on services was at £2.5bn, the deficit in the goods trade grew more than expected to £7.2bn from £6.6bn the month before, making for a deficit in the trade in goods of over £80 billion for 2006.
The strength of the pound, and the slower US growth have led to the goods trade gap with non-EU countries growing to £4.6bn from £3.9bn a month before – far greater than had been predicted
At the same time there is £1.4 trillion of household debt.
Yesterday’s increase in rates means that tens of thousands of people will lose their homes to the banks, unable to pay the higher mortgage interest rates. Many tens of thousands of credit card holders will also be bankrupted, with the banks holding the baby for the unsecured loans.
The Royal Institution of Chartered Surveyors (RICS) warned yesterday that for a two-person household on average incomes, home loan repayments already take up 22 per cent of take-home pay.
House prices have far outstripped incomes in the past decade, with the cost of buying a home rising by 278 per cent.
Just over 8,000 properties were seized by lenders in the first half of last year. In the first half of this year that figure could well be increased ten fold.
Another interest rate rise is expected next month. Its impact on mortgage and credit card holders will be enormous, as will its impact on rising levels of unemployment.
Britain’s vast indebtedness will then touch off a major run on sterling which bankers say is overpriced by some 20 per cent and heading for a major fall.
The response of the government once this crisis erupts, will be to push interest rates higher and higher and legislate huge cuts in expenditure, cutting public sector wages and the benefits of tens of millions of people.
At the same time, the crisis will push the imperialist powers into taking more decisive measures world wide to divide and redivide the world amongst themselves.
In this developing critical situation, workers will need a new and revolutionary leadership in the trade unions.
Only the Trotskyist movement is prepared to defend jobs, wages and basic rights and mobilise the working class to take action to bring down the capitalist government of the day, to go forward to a workers’ government that will nationalise the banks and the major industries under workers control, putting an end to dog eat dog capitalism.