The Governor of the Bank of England, Mark Carney. Photo: Getty
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To avoid squeezed households struggling, we must beware of premature interest rate rises

Households may struggle unnecessarily from premature interest rate rises if we continue to rely on the current key indicator of income growth.

Thursday’s interest rate announcement from the Monetary Policy Committee is unlikely to generate many headlines. “Bank does nothing for 65th month straight” is hardly a circulation-booster, even during silly season. But we can expect plenty of speculation alongside the announcement that the consensus among MPC members on holding rates will have been broken for the first time since the summer of 2011.

We won’t know for certain until the minutes are published in a couple of weeks, but it is surely only a matter of time before such divisions become apparent. At some point rates must rise, but getting the timing and pace of change right will be an extremely difficult task. Differences of opinion are natural. After all, on the one hand the UK economy is expected to be the pace-setter among advanced economies over the course of 2014; yet on the other, average wages continue to fall in real terms.

Making the right call is made both more difficult and more important by the continued presence of a debt overhang built up during the pre-crisis years. This legacy means that, even with rates at an all-time low, almost one-in-five mortgagors say they’re struggling to meet their repayments. Small initial movements in the base rate might not have a material effect on these households, but if the trajectory is such that borrowing costs normalise before incomes do, then the potential for repayment difficulties is significant.

The MPC is of course alive to this danger: Mark Carney has stated that rates won’t rise until “jobs, incomes and spending [are] growing at sustainable rates”. Yet, in relation to the key indicator of income growth, the committee is let down by the statistics it relies on.

Our best measures of what is happening to household incomes are derived from large-scale government studies. Both the Family Resources Survey and the Living Costs and Food Survey provide directly-reported information and allow us to understand patterns across the income distribution – an important distinction given that problem debt is particularly concentrated among those with low and modest incomes. Yet these surveys are annual and take time to report, thereby lacking the timeliness required to inform the MPC’s real-time decision making.

Unfortunately, the timely measure that the Bank instead relies on – Real Household Disposable Income – is not fit for purpose. It doesn’t just measure household income, but universities, charities and trade unions too. And it is deflated using a national accounts measure that has little to do with the actual spending patterns of households. As a result, the chart shows that RHDI per capita has consistently overstated income growth over the past 15 years or so: rising more sharply than the survey data in the pre-crisis years and falling less starkly in the subsequent period.

The cumulative difference in income growth between 1998 and 2013 as measured by the FRS median and the RHDI per capita is almost 9 percentage points. That’s equivalent to around £1,700. In debt terms, that’s the same as the extra annual repayment cost on a £150,000 mortgage following a 1.7 percentage point increase in the interest rate.

(Click on the graph to enlarge)

The difficult path that the MPC must steer means that such differences matter. That’s why, alongside a range of recommendations for how we can better prepare for the interest rate rise when it comes, we’ve called on the Bank to work with the ONS to fix its malfunctioning dashboard.

Debates within the MPC in the coming months will be a welcome sign that at least some aspects of the economy are improving. But those discussions must be informed by data that provides the best sense possible of what is really happening in our economy. Pushing too hard on interest rates as a result of misleading data risks generating headlines of the wrong sort.

Matthew Whittaker is chief economist at the Resolution Foundation

Matthew Whittaker is senior economist at the Resolution Foundation

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Commons confidential: Vive May's revolution

It's a risky time to be an old Etonian in the Tory party. . . 

The blond insulter-in-chief, Boris Johnson, survives as Theresa May’s pet Old Etonian but the purge of the Notting Hell set has left Tory sons of privilege suddenly hiding their poshness. The trustafundian Zac Goldsmith was expelled from Eton at the age of 16 after marijuana was found in his room, unlike David Cameron, who survived a cannabis bust at the school. The disgrace left Richmond MP Goldsmith shunned by his alma mater. My snout whispered that he is telling colleagues that Eton is now asking if he would like to be listed as a distinguished old boy. With the Tory party under new, middle-class management, he informed MPs that it was wise to decline.

Smart operator, David Davis. The broken-nosed Action Man is a keen student of geopolitics. While the unlikely Foreign Secretary Johnson is on his world apology tour, the Brexit Secretary has based himself in 9 Downing Street, where the whips used to congregate until Tony Blair annexed the space. The proximity to power gives Davis the ear of May, and the SAS reservist stresses menacingly to visitors that he won’t accept Johnson’s Foreign Office tanks on his Brexit lawn. King Charles Street never felt so far from Downing Street.

No prisoners are taken by either side in Labour’s civil war. The Tories are equally vicious, if sneakier, preferring to attack each other in private rather than in public. No reshuffle appointment caused greater upset than that of the Humberside grumbler Andrew Percy as Northern Powerhouse minister. He was a teacher, and the seething overlooked disdainfully refer to his role as the Northern Schoolhouse job.

Philip Hammond has the air of an undertaker and an unenviable reputation as the dullest of Tory speakers. During a life-sapping address for a fundraiser at Rutland Golf Club, the rebellious Leicestershire lip Andrew Bridgen was overheard saying in sotto voce: “His speech is drier than the bloody chicken.” The mad axeman Hammond’s economics are also frighteningly dry.

The Corbynista revolution has reached communist China, where an informant reports that the Hong Kong branch of the Labour Party is now in the hands of Britain’s red leader. Of all the groups backing Jezza, Bankers 4 Corbyn is surely the most incongruous.

Labour’s newest MP, Rosena Allin-Khan of Tooting, arrived in a Westminster at its back-stabbing height. Leaving a particularly poisonous gathering of the parliamentary party, the concerned deputy leader, Tom Watson, inquired paternalistically if she was OK. “I’m loving it,” the doctor shot back with a smile. Years of rowdy Friday nights in A&E are obviously good training for politics.

Kevin Maguire is the associate editor (politics) of the Daily Mirror

Kevin Maguire is Associate Editor (Politics) on the Daily Mirror and author of our Commons Confidential column on the high politics and low life in Westminster. An award-winning journalist, he is in frequent demand on television and radio and co-authored a book on great parliamentary scandals. He was formerly Chief Reporter on the Guardian and Labour Correspondent on the Daily Telegraph.

This article first appeared in the 28 July 2016 issue of the New Statesman, Summer Double Issue