No 226: The Bank of England Comes to The Rescue!

 IN a very uncommon move, the Bank of England has committed to spending £65 billion over the next two weeks in the UK Bond Market, in order to counter the effects in the market since the mini-budget last Friday. 

As one Conservative MP said (albeit someone who is not a Trussite), “The Bank of England is saving the UK economy from the policies of the UK Government.”

Since the mini-budget on Friday, which announced tax cuts without any clear indication of how these would be paid for, interest rates on UK Government borrowing lept from around 1% in January to nearly 5% yesterday. This is due to lack of confidence in the government’s policies.

The first few paragraphs of this article (https://news.sky.com/story/bank-of-england-takes-action-to-restore-orderly-market-conditions-after-mini-budget-panic-12706827 ) explain what the Bank of England did yesterday:

“The Bank of England has launched a temporary bond-buying programme as it takes emergency action to prevent "material risk" to UK financial stability.

It revealed that it would buy as many long-dated government bonds as needed between now and 14 October in a bid to stabilise financial markets in the wake of the mayhem that followed the government's mini-budget last Friday.

In addition to the plunge in the value of the pound, it has also seen investors demand a greater rate of return for UK government bonds - essentially IOUs.

That is because the level of borrowing required to fund the government giveaway, including tax cuts and energy aid for households and businesses, shocked the market which  government giveaway, including tax cuts and energy aid for households and businesses, shocked the market which immediately questioned the sustainability of the government’s finances.”

This article (https://www.theguardian.com/business/2022/sep/28/what-bank-of-england-doing-pound-dollar-uk-economy-interest-rates-bonds?CMP=Share_iOSApp_Other ) has a good more advanced explanation of the aims of the Bank of England’s actions.

No 225: Useful place to see live market data

 IF you want to see live changes in stock markets, exchange rates, bond rates etc (and who doesn't in the current economic situation), this has a good dashboard: https://www.marketwatch.com 

You can also click through to see charts. For instance here is the "Rates" dashboard which tells us about different interest rates governments are having to pay on their 10 year bonds:

If you click on a certain country's bond, you get more information including charts. Of course, what we all want to see at the moment is what's happening to UK government borrowing:

It's going up today, but it is even more striking to see what's been happening just in the last five trading days.

As you can see, the rate has increased by almost 1% since last Tuesday.

If you want to know why this is happening, read this previous post: 

https://spoteconomics.blogspot.com/2022/09/no-223-ers-irs-government-borrowing.html 

No 224: Varieties of Opinion on Friday's Mini-Budget

 AS could be expected, the mini-budget announced on Friday has proved to be divisive amongst economists. Basically, it has been welcomed by free market economists and criticised by interventionists. 

This (https://tinyurl.com/8nuyes9b) contains several short reactions representing views across what the article calls the "great divide" (from the Daily Telegraph, Daily Mail, Nigel Farage, the IEA, the FT, Daily Mirror, past officials from the Treasury and US Fed).

It is important for your own development as economists to weigh up these different viewpoints and to decide which of them you think is most justified.

No 223: ERs, IRs, Government Borrowing

AT the moment, there is a lot happening to exchange rates, interest rates and government borrowing in the UK, and it is quite hard to connect all of the together. Hopefully, the analysis below helps.

If you are looking for a longer, more in-depth, explanation, this is excellent: https://tinyurl.com/4ss2vf8p

What has been happening to the value of the Pound?

It fell at the end of last week after the announcement of the mini-budget. £1 is now worth $1.08. In fact, the Pound has been falling for a number of years now - in 2016, £1 was worth $1.55.

This is what has happened to it over the past year:

What makes a currency fall in value?

Generally, a currency falls in value if those who have it, wish to sell it (an increase in supply). This could be for a number of reasons, but the most important is if financial investors no longer wish to keep their money invested in a country since they believe the chance of making profits is not as good as in other countries.

Why do investors want to move their money out of the UK?

They lack confidence in the UK economy. This is due to its poor performance in recent months, but has been added to by worries about Friday's mini-budget.

The budget contained a number of tax cuts, which will be paid for by increased government borrowing. The freeze on energy bills also has added to this. Even though the UK government has a very good track record at always meeting its repayments, government debt is about to increase massively. This year, interest repayments on government borrowing will be £50 billion; it is forecast to rise to £100 billion next year. 

Markets and investors are worried that, even if the government can repay this, it will have an opportunity cost (e.g. government spending cuts) that will negatively affect the UK economy. There is also worry that the expansionary measures of the mini-budget (raising AD) may contradict the raise in the base rate by the Bank of England (reducing AD) so that neither growth nor inflation will improve.

Another sign of this concern is that interest rates that the UK government has to pay for the 10 year gilts (bonds) that it issues have risen from 1% at the beginning of this year to 4% now.

Additionally, whenever there are global worries over economic performance, investors prefer to move their money into US dollars as it is seen as the safest currency to have in a crisis. 

What are the effects of the falling Pound?

It makes the costs of imported goods rise. Consumer goods from abroad will be more expensive, adding to inflation, while imported raw materials will cost more, also adding to inflation as UK firms are forced to raise their prices. This would be negative at any time, but especially now with UK inflation already 9.9%.

It does also make the price of UK exports in other countries fall. However, at this time, this is not having too much of an impact - many other economies (like the USA) have their own inflation problems which is meaning their consumers cannot buy as much of anything as before with their income, including UK exports.

What's the link between the exchange rate and interest rates?

When a central bank raises its base rate - and therefore other interest rates in that country rise too - it usually attracts investors to put their money into that country, as they will now receive a greater return on deposits (money saved). By moving their money into the country, they demand more of the currency, causing the exchange rate to strengthen.

Even though there have been a series of rises in the base rate of interest by the Bank of England (the current rate of 2.25% is the highest since 2008), other countries have also been raising theirs. In fact, the rate in the USA is above 3%. Thus, there has not been as much upward pressure on Pound exchange rates from this as the textbooks might predict.  

No 222: Key Details of Today's Mini Budget

 (Taken from https://www.bbc.co.uk/news/business-62920969)

Income tax

• Cut in basic rate of income tax to 19% from April 2023
• Currently, people in England, Wales and Northern Ireland pay 20% on any annual earning between £12,571 to £50,270 (Rates in Scotland are different). 
• 45% higher rate of income tax abolished 
• One single higher rate of income tax of 40% from April next year

National Insurance

• Reverse a recent rise in National Insurance (NI) from 6 November
• Workers and employers have paid an extra 1.25p in the pound since April
• New Health and Social Care Levy to pay for the NHS will not be introduced

What is national insurance?

Corporation tax 

• Cancel rise in corporation tax which was due to increase from 19% to 25% in April 2023

Does cutting corporation tax always raise more money?

Benefits

• Rules around universal credit tightened, by reducing benefits if people don't fulfil job search commitments
• Around 120,000 more people on Universal Credit to be asked to take active steps to seek more work, or face having their benefits reduced

What is universal credit?

Stamp duty

• Cut to stamp duty which is paid when people buy a property in England and Northern Ireland
• No stamp duty on first £250,000 and for first time buyers that rises to £425,000 - comes into operation today
• 200,000 more people will be taken out of paying stamp duty altogether, government claims

Energy

• Total cost for energy package expected to be around £60bn for the six months from October

Bankers' bonuses

• Rules which limit bankers' bonuses scrapped
• Package of regulatory reforms to be set out later in the autumn

Shopping

• VAT-free shopping for overseas visitors
• Planned increases in the duty rates for beer, for cider, for wine, and for spirits cancelled

Breaking news - UK Base Rate Up to 2.25% - more to follow

No 221: A New Supply Side Policy for Part-Time Workers

THERE will be a large number of new government economic policies announced over the next few days (especially in tomorrow's mini-budget), but this one caught my eye as a good example to be noted of a new supply side policy.

You can read all the details in the article below, but the basic idea is to require those workers who are currently employed part-time and also receiving benefits to take action to find full-time work. If effective, this would reduce spending on benefits and also increase the labour resource in the economy. 

If you were writing about this in an essay, how would you show this policy on a diagram?

Which evaluation point(s) would you choose?

https://www.theguardian.com/politics/2022/sep/21/kwasi-kwarteng-to-shrink-part-time-work-benefits-to-grow-labour-supply?CMP=Share_AndroidApp_Other 

No 220: Patagonia Give Away

I REALLY like Patagonia clothing - I have 4 of their shirts, 2 bags, and a jacket - and one reason is the ethical stance they have had since their formation. However, all previous activism by them was far surpassed last week, when their owner effectively gave the company away!

The full details are in the excellent CNBC article below, but, in brief, Patagonia is still going to be run as for profit company, but every penny of profit will be put into their climate change charity. The owner, Yvon Chouinard, has some very interesting views on why it is important that Patagonia does remain run as a for profit company, and why selling shares publicly in the firm would have been a mistake.

https://www.cnbc.com/2022/09/21/patagonia-must-remain-competitive-for-climate-change-donation-ceo.html

No 219: US interest rates hit 14-year high in inflation battle

 READ here: (https://www.bbc.co.uk/news/business-62973376) for a BBC article about the rise in US interest rates announced today. The main base rate has gone up from 2.5% to 3.25%. This is of course important for the US economy itself, but it also makes it more likely that Central Banks in other countries will raise their rates as well.

(The Bank of England MPC make their announcement tomorrow - look out for it!)

The article contains this interesting chart of what has happened around the world with interest rates:

SPOT OF ECONOMICS RESTART

THIS blog originally ran from 2010 and 2012 (you can see the posts below). I have decided to start it again now - ten years later! - to assist my current students to find and read Economics stories. 

This is a very busy and interesting time for Economics news, and it has never been more important for students to include real-life examples in their work. 

Therefore, hope this blog will once more prove useful!