Today it has been reported that the high street banks are raising their mortgage rates by between 0.25% and 0.5%. This is despite the fact that the Bank of England is unlikely to raise rates for at least the rest of the year and there has been more Quantitative Easing.
The problem for the economy is that higher rates of interest, especially for mortgages, will lead to lower discretionary income and so lower aggregate demand. This is exactly the opposite of what the economy needs at present.
The aim of Quantitative Easing is to increase the liquidity in the money markets and so reduce the market rate of interest. Yet the high street banks say that they are finding it more expensive to obtain funds and hence the rise in mortgage rates.
The problem for the banks is that they have to pay somebody for the use of the funds they lend to customers. This may be those who save with them or they may borrow in the interbank market.
Karl Popper, a philosopher of science, urged theorists to set out falsification conditions for their ideas. These are things that would be observed if the theory is wrong. It would seem that after three rounds of QE and the ECB lending billions to UK banks, the rise in market rates qualify as a falsification condition for the effectiveness of monetary policy.
The Telegraph covers British banks borrowing from the European Central Bank here
Written from my sick bed
No comments:
Post a Comment