Worldwide Financial Planning’s Investment Director, Martyn Page, is on his annual pilgrimage to Glastonbury. In his absence, we wanted to test out recent advances in Artificial Intelligence. Here’s what we told the ChatGPT chatbot: You are the Governor of the Bank of England. You are helpful and friendly. You have drank a large martini. You will write a clear, simple and apologetic letter to the public explaining the need for interest rate rises. In an era of media manipulation, your truths will be unvarnished. Write no more than 1500 words.

Dear Pronoun,

In recent years it has become fashionable to issue contrition-free apologies. Today, I would like to apologise for the Bank’s failure to keep on top of monetary policy in recent years and the size of the subsequent burst of inflation. Unfortunately, this means that we might have to engineer a nasty recession. I apologise for that, too. Please do not take this personally, it’s strictly business. The truth is that I and my colleagues at the Bank have been slow to react. We should have raised rates earlier and faster to offset the effects of those Covid support payments. In our defence, I would cite the words of Billy Joel: We didn’t start the fire, but we tried to fight it.

I have explained to the current prime minister that in order to squash rampant wage inflation, we need to create more unemployment, which at 3.8 per cent is frankly far too low for comfort. Since the chancellor has already increased taxes and there is a general election due in the next 12-18 months, there is little he can do to cool an economy that has performed better than anyone had expected last autumn. Imagine how well it might have done if there hadn’t been widespread strikes and extra public holidays. As a central banker I shudder at the thought. We would have looked even further behind the curve.

Many of you will remember that in February 2022 I politely asked workers to exercise restraint in demanding pay rises in order to get through the current inflationary burst more quickly but was ignored. Perhaps that’s because, when asked, I was unable to recall my own salary. My chief economist then made an unforced error two months ago, by admitting the truth in a US podcast: everyone is reluctant to accept that they are worse off so prices are pushed up and workers demand pay rises to compensate, and so it goes on. He was quite right. But people simply don’t want to listen.

Even though current wage rises are negative in real terms, far too many people are still frittering their recent annual pay rise on a nice little summer outfit from Next or yet another foreign holiday. This will not do. Such behaviour is making it harder for the Bank to hit its 2 per cent inflation target. Inflation is currently highest in air fares to Europe (up 20 per cent from April to May) and in restaurants/hotels. Far too many people are having a good time. We at the Bank are determined to put a stop to this. As you know, the Bank’s chief weapon is interest rate policy. It is a clumsy tool. Nevertheless, our plan to beat the housing market into submission is progressing well, but more needs to be done. 

Last summer, when interest rates were around 1.25 per cent, we quietly abolished the affordability test for mortgages whereby homebuyers had to demonstrate their ability to cope with a 3 per cent rate rise. The affordability test was, of course, designed to protect banks, not borrowers. I apologise if the media led you to think otherwise. Anyway, we have now ensured that banks are sturdy enough to cope with a sharp rise in delinquent mortgages while retaining their vital ability to lend to the more productive parts of the economy. That was Stage One.

We are currently in Stage Two. With mortgages rates now back up to where they were during last autumn when former Prime Minister Truss triggered a panic attack in the gilts market and everywhere else too, we are at last starting to see fear returning to some consumers. And not a moment too soon, say I. Although inflation will drop markedly after July when falls in the energy price guarantee are factored in – I’m afraid this alone will not be enough to squash pay demands to keep up with the Joneses, whom I believe are off to the Seychelles. Again. 

Needless to say, the Bank intends to keep interest rates as high as possible until it is crystal clear that inflation has been squeezed out of the system. That means we need to see core inflation running at less than half its current rate of 7.1 per cent. Alas, this could take longer than you have been led to expect. We hope you understand that it is all for your own good. As former Prime Minister John Major once said: If it isn’t hurting, it isn’t working.

We won’t be asking the banks to engage in widespread repossessions, although there will be some. I can tell you they were really relieved to hear that, because the whole process ties them up for years – and they rarely get all their money back. Instead, we have asked them to ‘extend and pretend’. This means talking to you about extending the length of your mortgage, maybe only repaying the interest part of the loan or perhaps allowing you to skip loan payments for longer than usual before calling it a bad debt. Banks will then be able to continue with their dividend payments and the vast majority of borrowers should be able to remain in their homes. Let no one say the Bank of England is heartless.

I’ve told the Chancellor that he is not to give any meaningful financial help to those with a mortgage. If he disobeys, we will simply increase interest rates even more to offset this. Instead, I’ve suggested that the prime minister gives the banks a stern lecture about their duty of care towards customers. Hopefully they will comply. It is always useful to have a scapegoat to blame in order to deflect attention and banks are particularly suitable for this role, if things go wrong.

It’s not been easy for me, either. The consequences of Covid have made my job much harder. The large number of skilled workers still unable to return to the workforce because of an array of long Covid symptoms has made the current labour market extremely tight. We at the Bank have privately discussed the need for interest rates to go much higher than markets expect in order to break this resilience.

Lest you think we are only targeting mortgage-payers, I must add that our higher rates are already having a knock-on effect on rents, which saw an annual rise of 5 per cent in May. This allows us to restrain the spending of 46 per cent of dwellings. But higher interest rates don’t just affect mortgage rates. Credit card debt and unsecured loans will also cost more. This is how we hope to limit the spending of the 17 per cent in housing associations and other social renters. Of course, there’s not much we can do to curb the spending of the remaining 37 per cent who own their properties outright, but you can’t have everything. We have asked banks to be parsimonious in their deposit rates. I think it’s the least we can do in the name of fairness to all.

Higher interest rates also increase the cost of borrowing for businesses. We want companies to feel uncertain and hold off from pushing through price rises. We want workers to feel worried about their jobs and accept that static pay is better than no pay. We’d be thrilled to see the airlines and leisure companies issue profit warnings. It is only when we see this kind of uncertainty and weakness that we can start to relax.

Stage Three is the much-needed cut in interest rates that people had hoped would begin before Christmas. Here’s why it could take longer. Once upon a time, most mortgages were on variable rates, so interest rate changes quickly fed through to the economy a month later. However, a decade of ultra-low rates meant most borrowers took fixed-rate loans. These have insulated households from the restrictions of higher rates and, rather like Wile E Coyote, they carried on blithely walking on air. Now they are starting to look down.

By the end of 2026, almost all households with a mortgage will have moved to a higher rate, and, unless banks extend their terms, are likely to end up with annual mortgage bills that are £2,000 higher on average compared to December 2021. A large slug of this falls due in 2024, when a general election is likely. But since the government already expects to lose this, I won’t have to deal with much harassment from Number Ten. Anyway, my job contract doesn’t expire until 2028, so I am quite relaxed. It’ll be a different lot of politicians by then. 

I hope you have found this little fireside chat to be helpful, I know I have. There are some things one simply cannot say at a Bank of England press conference. But if you have found any of it unpalatable, well. . . I’m sorry.

Lots of love,

The Governor

* FYI - this is a satirical piece written by our Investment Director Martyn Page and has not been put through Chat GPT or indeed any other AI tool.

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