Interest rate hikes ‘net positive’ for economy but not everyone

Published

2 years ago

January 5, 2024

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Here’s a sentence which might sound a little odd: higher interest rates have been good news for the UK economy.

For the first time in many decades, the pain faced by borrowers from higher interest rates has been more than balanced out by the benefit experienced by savers from those interest rates.

If this sounds a little odd it’s partly because invariably, when people – the media, politicians and economists – talk about interest rates they focus unduly on one side of the equation: the plight of the borrower. And there’s an understandable reason for that: in previous “hiking cycles”, when the Bank of England raises interest rates, that pain has invariably outweighed the windfall.

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That was the case when borrowing rates were lifted in 1988; it was the case in 1996, in 2003 and in 2006.

In each case the overall impact, across the economy, on households’ balance sheets was negative.

But not so this time around.

According to the Resolution Foundation, the net income we’ve earned, across the economy, as a result of interest rates, has actually risen rather than fallen – up by a percentage point since rates started going up.

To put that into perspective, the “interest rate effect” on incomes in the late 1980s was -1.5 percentage points.

And what’s striking, when you compare the UK to the euro area and the US, is that we are a bit of an outlier: the interest rate effect, across the economy, was much more positive than it was in those two other areas.

This, says the Resolution Foundation, is at least part of the explanation for how the UK hasn’t yet slipped into the recession a lot of people anticipated this time last year.

Part of the explanation for this is that it so happened, in large part because of the pandemic lockdowns, that people began this hiking cycle with a lot of savings in their bank accounts – far more than usual.

The upshot was that, across the economy, the benefit from those savings (and savings rates went up very quickly – albeit not to the levels of borrowing rates) was greater than the impact on mortgages and loans. Another part of the explanation is that so far only around half of those with fixed-rate mortgages have re-fixed their loans.

But there are a few very important provisos here. The first and perhaps most important is that while the above is certainly true across the whole economy, there’s a dramatic difference of experience for different categories of people.

Those whose debts outweigh their savings (which in this case mostly means younger people) will certainly see a negative impact from higher rates. Those with far more savings than debts – the older segments of the population – will see a benefit. In other words, the pain and the dividends are not being equally shared out. The old are doing much better; the young are doing worse.

And there are two other provisos. The first is that this positive impact will begin to wear off as more and more people re-fix their mortgages and go up from low-interest rates to higher rates. Even though the typical fixed-rate deal has been coming down recently, it’s still far higher than it was two or five years ago.

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The final proviso is that none of the above takes into account the broader impact of the cost of living crisis.

Everyone is having to pay higher prices for nearly everything. And while the annual rate at which those prices are increasing (inflation) has decelerated, the level of prices remains more than 15% above where it was a couple of years ago.

That’s a painful adjustment for everyone. The good news is that the impact of rates – across the economy as a whole – has actually been positive rather than negative. But not everyone will be seeing the benefits.

UK

Labour deputy leadership: Contest to replace Rayner set to become two-horse race

Published

6 hours ago

September 11, 2025

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Labour deputy leadership: Contest to replace Rayner set to become two-horse race

Labour’s deputy leadership contest is on the brink of becoming a two-horse race between Bridget Phillipson and Lucy Powell, as the other three candidates scramble for nominations.

The official tally from the Parliamentary Labour Party (PLP) on Wednesday night put Ms Phillipson, the education secretary, ahead with 116 nominations.

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Ms Powell, the former Commons leader who was ousted in Sir Keir Starmer’s reshuffle last week, is behind with 77 – just three shy of the 80 needed to make it to the next round.

Bell Ribeiro-Addy, Paula Barker and Dame Emily Thornberry all had support from 15 or fewer MPs as of Wednesday evening, fuelling speculation they could follow in the footsteps of housing minister Alison McGovern and pull out.

Ms Barker, the MP for Liverpool Wavetree, told Sky News she was “genuinely undecided” and had a lot to consider.

Ms Barker, a former trade union official, has challenged the government on Gaza and welfare cuts and is part of the newly formed soft-left “Mainstream group”.

Her allies are keen for her to stay in the race, with one telling Sky News she “outshone the others by miles” during an online hustings event for MPs, and would be a “real alternative for the membership”.

Her supporters are expected to throw their weight behind Ms Powell if she does drop out, with one saying of the Manchester Central MP: “She is closer to Andy Burnham, and she was just sacked, so those who dislike Morgan McSweeney [the prime minister’s chief of staff] I guess will get behind her.”

However, while describing her as “slightly more left” than Ms Phillipson, they said she is “hardly a socialist”.

Some MPs want to avoid a race between Ms Powell and Ms Phillipson, believing there is not much difference in what they offer, but others had more praise for the former, calling her performance at the hustings impressive.

One MP said: “Her pitch is that she’s been the shop steward of the parliamentary Labour Party (PLP) in government, but now she’s not in government she can dedicate herself to the role of deputy leader full time without a department to run. She wants to focus on defining our voter coalition and making sure we’re speaking to them.”

They added that Ms Phillipson might be too busy to fulfil the deputy leadership role, especially with SEND (special educational needs and disabilities) reform coming down the track “which could be a horror show”.

Ms Phillipson has been making the case to MPs about her experience fighting populism in her Houghton & Sunderland South seat in the North East, where Reform UK is on the rise.

Dr Jeevun Sandher said he was won over by the education secretary following her pitch at the hustings in which she also spoke about the cost of living crisis.

The MP for Loughborough told Sky News: “Bridget was strong, articulate, and very impressive. She was able to communicate the deep thought we need to govern well and win the next election.”

The deputy leadership race was triggered by the resignation of former deputy prime minister and housing secretary Angela Rayner after she admitted underpaying stamp duty on a flat.

The candidates need 80 backers by 5pm Thursday. As of Wednesday evening’s tally, 235 MPs had made their nominations out of Labour’s 398 MPs.

Ms McGovern pulled out on Wednesday afternoon, saying it was “clear that the momentum of this contest had shifted, and I am not going to progress to the next stage”.

The MP for Birkenhead was rumoured to be Number 10’s preference before it was clear Ms Phillipson – who she has since nominated – would enter the race.

Timeline for the race

Many Labour MPs are keen to see someone who would work constructively with the prime minister to avoid the party becoming more divided.

There are also calls for the deputy leader to be from the north to balance out the number of cabinet ministers who represent London seats – which both Dame Emily and Ms Riberio-Addy do.

If more than one candidate secures 80 nominations by Thursday evening, they will then need to gain backing from either three of Labour’s affiliate organisations, including two trade unions, or 5% of constituency parties.

That process will continue until 27 September, meaning a contested election threatens to overshadow the party’s annual conference that begins in Liverpool the next day.

The successful candidates will then appear on the ballot for a vote of all party members and affiliated party supporters, which will open on 8 October and close on 23 October at 12pm.

The winner will be announced on Saturday 25 October.