News Column

Financial Mail on Sunday, London, Simon Watkins column

August 24, 2014

By Simon Watkins, Financial Mail on Sunday, London

Aug. 24--A rise in interest rates is back on the agenda and fears abound that Britain is not ready for higher borrowing costs. Too few households are planning for a rise in the cost of their mortgage. Too many it seems are not even aware that such a rise may be on the way, as we report on the opposite page.

The problem is that while we have an economic recovery of sorts, so far it looks a like recovery with little prosperity.

We have noted many times before that wage increases still lag behind inflation. Last week official data showed that tax revenues are also not rising as might be hoped, which threatens the Chancellor's objective of cutting the spending deficit.

Tax revenues, of course, are simply the Government's cut in everyone else's earnings and profit. If earnings do not increase it is hard to raise more tax.

Figures last week also showed that consumer spending on food actually fell in July the first time such a thing has happened since records began.

There may be short-term effects to explain some of these figures, but the general picture is clear. There is economic growth, but prosperity is thin on the ground.

My view is that interest rate rises now or in the near future could be extremely damaging.

A real debate in the Bank of England'sMonetary Policy Committee on this issue is welcome because it may focus minds on the fact that interest rate rises are coming. But the economy is not ready for them.

Over the coming year, rates will eventually rise by at least 0.25 and possibly by 0.5 percentage points. That will add about pounds sterling 450 a year to the cost of a typical pounds sterling 150,000 mortgage.

That money will have to come from somewhere. But where?

If the answer is by more scrimping on the grocery bill then the supermarkets are in for yet more tough times ahead.

THE flow of business figures warning of the risks of a Yes vote in the Scottish independence referendum is becoming a flood.

In the last week Doug Flint, chief executive of HSBC, has warned that independence will bring costs and risks because of the likely loss of currency union.

It followed a warning from Sir Ian Wood, chief executive of Wood Group, a leading oil services company, that estimates favoured by the Scottish National Party of future oil revenues for an independent Scotland may well be far too optimistic.

The Yes campaign is being wilfully blind to the dangers for Scotland outside the sterling zone.

The claim that an independent Scotland would be more prosperous looks weaker and weaker by the day.


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Source: Financial Mail on Sunday (London, England)

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