Tag: Liz Truss

Interest Rate Hikes Will Make Climate Change Worse

Mary Pat Campbell

Link: https://jacobin.com/2022/10/interest-rates-climate-change-liz-truss-tories

Excerpt:

Raising interest rates won’t just push Britain into a recession and make the cost-of-living crisis worse for working-class people — it will discourage badly needed investments in green energy, undermining the UK’s efforts to address climate change.

….

The theory goes that higher interest rates help bring inflation down by making credit more expensive across the economy and reducing the amount of money firms and families have to spend on goods and services, thereby slowing price increases. But our inflation is predominantly driven by external factors, most notably high gas prices resulting from COVID-19 supply issues and the war in Ukraine. Instead, the bank’s policy is likely to push the UK economy into a recession, without addressing the main underlying causes of rising prices. That also means higher costs of borrowing for the very investments we need to reduce our reliance on costly fossil gas, like wind farms and home insulation.

To compound the problem, higher interest rates discourage investment in clean projects more than dirty ones. Running renewables doesn’t cost much: they rely on free wind and solar energy instead of expensive fossil fuels. But building them in the first place does come with high initial costs, meaning they are particularly impacted by the higher costs of credit. Similarly, insulation and heat pumps need to be paid for up front, before they begin to lower energy bills for households. Demand for improvements like heat pumps is significantly influenced by the availability of cheap loans to cover the initial installation costs.

Author(s): LUKASZ KREBEL

Publication Date: 23 Oct 2022

Publication Site: Jacobin

The triple lock will condemn Britain

Mary Pat Campbell

Link: https://www.spectator.co.uk/article/the-pensions-triple-lock-will-condemn-britain

Graphic:

Excerpt:

The triple lock says that each year the state pension will increase by inflation, average earnings, or 2.5 per cent, whichever was highest in the year before. It is hugely popular with the Conservative party’s elderly base. It is also a fiscal and economic millstone around the British government’s neck.

The last two years have amply illustrated the basic problems with the design of the scheme. The first is that it was clearly not created with unusual economic circumstances in mind. In 2021, wages dropped in a short but deep recession. The next year, they went back up again. In economic terms, very little had changed. The rule used by the triple lock, however, treated this like a period of strong economic growth. If it had been left untouched, pensions would have increased by 8 per cent. And thanks to the ratcheting effect of the triple lock mechanism, they would have retained that boost against UK GDP into the long term.

In the end, the government ended up suspending the triple lock for a year, only to fall right into another unusual situation: stagflation, where economic activity stagnates but inflation skyrockets. Again, the triple lock recommends a large boost to pensions when government finances are already under strain, and again, this would lift up pensions as a share of GDP long term. And again, the government should suspend the rule to avoid this. But it seems Liz Truss has bottled it. 

You would have thought it tempting for the Conservative party to wave these away as two unusual years; in normal times – when GDP, inflation, and earnings increase together – then everything would be fine, right? Well, no. The way the triple lock is designed means that whenever you have a downturn, pensions will tend to rise as a share of GDP. And whenever you have a boom, they keep pace. The net effect is a constant ratchet where pensions,  in the words of the work and pensions select committee, take up an ‘ever-greater share of national income’.

This is not sustainable. Spending on the state pension is already set to rise significantly as a share of GDP over the coming decades; as the population gets older, there are more people claiming pensions and fewer working to pay for them. Add the triple lock into the mix, and you double the expected increase in demand. Scrapping the arbitrary 2.5 per cent element doesn’t do a lot to help, either; you still have significant growth through the ratcheting effects of the first two elements.

Author(s): Sam Ashworth-Hayes

Publication Date: 19 Oct 2022

Publication Site: The Spectator UK

Bank of England in £65bn scramble to avert financial crisis

Mary Pat Campbell

Link: https://www.theguardian.com/business/2022/sep/28/bank-of-england-in-65bn-scramble-to-avert-financial-crisis

Graphic:

Excerpt:

The Bank of England has been forced into emergency action to halt a run on Britain’s pension funds after the impact of Kwasi Kwarteng’s ill-received mini budget prompted fears of a 2008-style financial crisis.

Threadneedle Street said the fallout from a dramatic rise in government borrowing costs since the chancellor’s statement had left it with no choice but to intervene to protect the UK’s financial system.

City sources said the surprise move, less than a week after Kwarteng’s unfunded tax giveaways, was needed to halt a “doom loop” in the bond markets that risked draining pension funds of cash and leaving them at risk of insolvency.

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Interest rates on government bonds, or gilts, have risen sharply since the chancellor’s £45bn package of tax cuts – making it punitively expensive for thousands of pensions funds to fund their hedging activities.

Officials in the Financial Services Group of the Treasury were at an away day – said to have been held at the Oval cricket ground in London – on Wednesday, but returned to their desks that afternoon. A source said they were not working on the response to the Bank of England’s announcement.

The Bank’s action helped provide Kwarteng with some respite from the financial markets after three days of turmoil that has seen sterling hit its lowest ever level against the dollar, strong criticism of the mini-budget from the International Monetary Fund, about 1,000 mortgage products pulled and interest rates on UK government bonds hit their highest level since 2008. Bond yields fell while the pound recovered in the currency markets after Threadneedle Street’s announcement.

Author(s): Larry Elliott, Pippa Crerar and Richard Partington

Publication Date: 28 Sep 2022

Publication Site: Guardian

Pension funds crisis forces £65bn bailout by Bank

Mary Pat Campbell

Link: https://www.telegraph.co.uk/business/2022/09/28/pension-funds-crisis-forces-65bn-bailout-bank/

Graphic:

Excerpt:

Britain’s pension funds were on Wednesday at the centre of the financial crisis sparked by the mini-budget forcing the Bank of England to launch a £65 billion emergency bailout. 

The Bank warned of a “material risk to UK financial stability” and stepped in to buy long-term gilts, as plunging markets for UK debt sent borrowing costs spiralling and forced pension funds to dump their assets. Economists compared the crisis to the run of withdrawals that led to the collapse of Northern Rock in the financial crisis. 

However, the move by Governor Andrew Bailey helped restore some calm to markets, and pensions experts said retirement pots were not under threat. Nevertheless, worries that Mr Kwarteng’s radical mini-Budget will trigger further shocks for investors in gilts wiped billions of pounds off the stock market value of Britain’s biggest pension funds.

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The Bank hopes to halt a domino effect in the City by temporarily suspending plans to offload £80bn of gilts held on its balance sheet. Instead for 13 days it will revert to buying them at a rate of £5bn per day using newly created money in a process known as quantitative easing.

The measures sparked a sharp rally in the market for the 30-year gilts that pension funds had been forced to sell. The cost of such borrowing fell by more than 1 percentage point, a significant downward move. Meanwhile the pound fell initially after the Bank’s announcement on fears of further inflation but recovered to finish roughly flat at nearly $1.09 against the dollar.

Author(s):

Tim Wallace
and
Ben Riley-Smith

Publication Date: 28 Sept 2022

Publication Site: UK Telegraph