Negative Real Interest Rates
Definition of Negative Real Interest rates - When the inflation rate is higher than the Bank of England Base Rate. Negative real interest rates are bad for savers and good for borrowers (assuming their income increases in line with cost of living)
The UK, is now experiencing negative real interest rates for the first time in 27 years.
- RPI inflation is 5.1% (rounded down to 5%) This is the most comprehensive measure of living costs
- RPIX inflation is 5.3%
- CPI inflation is 4.4% (this is the government’s preferred method, but, excludes housing costs and council tax)
- Base rates are 5%
- Food inflation is in double figures.
- Rising inflation and falling growth is known as ’stagflation’
This 16 year peak in inflation puts pressure on the Bank of England to increase interest rates (or at least not cut them. Inflation is now far above the government’s target of 2%. The Bank will also be concerned that the current spike in inflation will increase inflationary expectations and make it more difficult to reduce in the long term. (When inflation is high people will start demanding higher wage increases and this cements the higher inflation)
Any Good News on the horizon?
- Oil prices are starting to drop after their summer peak. Supermarkets like Morrison’s are cutting petrol prices. Lower petrol prices, would definitely help reduce inflation over next few months.
- Lower economic growth and rising unemployment is keeping a lid on wage inflation (although the downside here is that people are not experiencing increases in living standards)
What Will Happen To Interest Rates?
The MPC face a difficult dilemna. They will be hoping inflationary pressure work their way out of the system soon. They don’t want to increase rates with the risk of recession. But, they don’t like to see inflation above the target. I think they will keep interest rates the same at 5% for a few months and see how things develop.