Inflation, like an uninvited guest, is making itself felt in the UK, affecting everyday finances, right from interest rates to mortgage repayments.
While this is a headache for most, for some, it’s business as usual. This uneven distribution of pain makes it clear that the current monetary policy isn’t doing enough to quickly combat inflation.
Rebalancing housing policies
A key area that’s been disproportionately affected is the housing market. It’s a market segment where a delicate balance must be maintained between the needs of first-time buyers and the housing demands of an ever-growing population.
The economist, Kate Barker, who was part of the Bank’s Monetary Policy Committee (MPC) from 2001-2010, has been calling for balanced housing policies. Her argument, dating back to an influential 2004 report, called for the creation of more new homes.
Barker suggests that increased interest rates may not significantly impact housing prices due to factors like the growing prevalence of fixed-term mortgages, the banking industry’s practice of forbearance, and the country’s relatively low unemployment.
Instead, a period similar to the early 1990s may be in store, where the growth of housing prices was sluggish, thereby increasing affordability over the medium term.
However, the bigger picture is somewhat bleak. The past decade’s low-interest rates have not delivered a bounty of benefits. One would expect that the UK government would have capitalized on the low borrowing costs to build more housing or fund necessary projects.
Unfortunately, this was not the case. Instead, we’re left with unmet targets, aging infrastructure, and hefty future investment requirements.
Fiscal intervention: The road less travelled
So, where did things go wrong? A key misstep, according to Barker, was the over-reliance on monetary policy as the panacea for economic woes. Barker highlights that significant economic shocks sometimes necessitate a joint response from both fiscal and monetary policies.
Current UK Prime Minister, Rishi Sunak, has vowed to slash inflation, but his approach has mostly been to allow the Bank of England to lead the charge.
However, Barker believes that the responsibility for curbing inflation needs to be shared more broadly, and that includes implementing tax hikes on the wealthier portion of the population. She asserts that it’s an unpopular but essential measure to consider in the fight against inflation.
Adjusting fiscal policy might not be the only step to tackle inflation. A closer look at the housing industry could uncover numerous areas of inefficiency.
For instance, there’s a dearth of capital gains tax on primary homes, the stamp duty is far from uniform, and stringent greenbelt regulations hinder new developments. These long-standing, politically sensitive topics demand reconsideration for a more efficient housing market and subsequently a healthier economy.
By addressing these inefficiencies, the UK government can not only better manage inflation but also stimulate economic growth. Of course, taking these steps won’t be easy, and there will be resistance.
Yet, the long-term gains could be worth the short-term political discomfort. As Barker wisely observes, the solutions may involve repeatedly voicing unpopular opinions until they are finally embraced.
In the face of rising inflation, the UK must consider a multi-pronged approach that includes fiscal policy adjustments and strategic changes in housing policy.
