On Thursday at midday the Bank of England’s monetary policy committee will announce an interest rate rise. Some City analysts have predicted the announcement will jack up the rate by 0.75 of a percentage point (mimicking that of the European Central Bank in early September) to a total of 2.5%. An upward jump of this size has not occurred since the Bank was made independent in 1997. And the last time interest rates have moved by more than half a percentage point in either direction was in the depths of the 2008 banking crisis, when they were cut rapidly in an effort to shore up the circulation of credit.
Even if, as other observers expect, the announcement is merely of a rise of a 0.5 percentage point, it will be one more step on a staircase that is likely to reach at least 4% by early next year. Regardless of pace, these rises mark the conclusion of one of the most extraordinary economic policy experiments in modern history. The architects of this era – characterised by uniquely low interest rates – were unelected technocrats rather than politicians, and yet they leave a profound political and economic legacy of spiralling inequality, channelled above all through the ownership of housing.
In the 314 years separating the founding of the Bank of England and the 2008 crisis, interest rates had never once fallen below 2%. But for most of the past 14 years, they have been below 1%. Throughout David Cameron’s time in Downing Street, interest rates were stuck at the previously unthinkable level of 0.5%. When disruption struck in the form of the Brexit vote, they were cut further. When an even bigger shock hit in the form of international lockdowns, they were cut further still, right down to 0.1%. Added to this was the asset-purchasing programme (quantitative easing), which drove effective interest rates down yet further, and is only now being gradually unwound.
The reasons for these exceptional decisions were clear. The financial system seized up between 2007 and 2009, with banks becoming unwilling to lend to each other. Cheap money was injected like a blood transfusion to stabilise the system. The austerity measures of George Osborne, which mendaciously blamed Britain’s economic woes on government debt, resulted in such dire economic stagnation that only unprecedented monetary policies could stave off a depression. With the government refusing to stimulate the economy using fiscal policy, and inflation well below the Bank’s target of 2%, the job of growing the economy fell to monetary policymakers, whose only tool was to create more and more cheap money, and whose only point of intervention was high finance. None of this was about getting money to the areas of greatest social need, and it did nothing to aid those who depended on unsecured borrowing through credit cards or payday loans.
What can we say about the social and political legacy of this era, that is now at an end? It was, of course, a period of rapid house price inflation, fuelled by the ultra-cheap mortgages on offer. That in itself wasn’t unprecedented: house prices also rocketed during the Blair era (rising by 25% in 2002 alone), a time when interest rates were at historically normal levels.
The difference with the post-2009 regime was, first, that access to all this cheap credit was drastically tightened by regulators, to prevent more risky lending. This produced the spectacle of “safe” borrowers being able to access untold financial opportunities, while others were shut out. This meant a massive potential outlay of credit to existing asset-owners – including existing homeowners.
In 2016, buy-to-let properties accounted for 20% of all mortgage lending by value. Owner-occupiers who had already built up a comfortable cushion of capital had the luxury of refinancing at ultra-low cost (often paying far less for housing than renters), with many becoming cash-rich on equity withdrawal. Thousands of middle-class loft conversions, cars, luxury bathrooms and holidays of the past 13 years are ultimately side-effects of the Bank of England’s efforts to stimulate the financial system. In 2021, a record £4.3bn of equity was released by UK homeowners.
Second, post-2008 wage stagnation meant that (except for those working in financial and business services) opportunities to join this asset-owning class by getting on the housing ladder became increasingly dependent on family gifts and inheritances. One of the many dysfunctional legacies of the 2009-to-2022 era is extreme intergenerational inequality when it comes to wealth and space, such that over-65s now own 47% of all housing equity and 7.4m “extra” bedrooms. Many buy-to-let landlords have come to view rental properties as their main pension, or even a guaranteed income for their own children.
The intergenerational politics resulting from this toxic settlement has been well documented by the likes of Chloe Timperley and Keir Milburn, and manifests itself clearly in voting behaviour. It’s well known that older voters are more likely to vote Conservative and to have voted leave in 2016, but less often noted is that these voters are also significantly more likely to be homeowners.
But it has also produced an unpleasant form of economic progress, that breeds paranoia and resentment for all. Each time the UK economy has run into trouble over the past 14 years, things have got even better for asset owners. As money was drained from local government by Osborne, trade seized up due to Brexit, and workplaces and pubs were shuttered due to Covid, more cheap money was made available and house prices (and other assets) rose yet further. No money for a new public swimming pool; plenty for a new free-standing bath. Margaret Thatcher’s famous line “There is no such thing as society. There are individual men and women and there are families” went from being dogma to everyday reality.
For those who managed to lock in their interest rates before August, the exclusive party will continue for a few more years. But symbolically and politically it is over. What will follow it? Liz Truss and Kwasi Kwarteng have made it clear that they have no egalitarian sympathies, and the unprecedented fiscal outlay of capping household energy bills will be thoroughly regressive. House prices look set to fall in 2023, but wages are already falling at their fastest rate on record. None of this looks good, and will surely cost Truss votes.
Hiking interest rates at this time will make things worse for millions of people, and will do nothing to bring down prices that are high for geopolitical reasons, such as the war in Ukraine. But looking back on that unique and weird post-2009 era, we should be clear that cheap credit – for some – was never a sufficient answer to Britain’s economic problems, and seeing it as such has been a cause for many of the social injustices, status anxieties and anger of recent times.