UK Economy 'One of the Most Vulnerable' Due to Inflation, Mortgage Tendencies, Expert Says
MOSCOW (Sputnik) - The economy of the UK is currently "one of the most vulnerable" in the world as the government's move to increase the interest rate damages households rather than contains inflation because the UK mortgage market is "heavily short-term," investment strategist Mike Harris told CNBC broadcaster in an interview published on Monday.
"I would say the U.K. is one of the most vulnerable countries in the world right now because of that dynamic and the fact that central bank governors didn't do anything about it, they still might have some time," Harris said.
Furthermore, UK inflation is mostly "imported" from abroad, therefore, the increase of the interest rate, which ordinarily serves to manage supply and demand on the market, is pointless in terms of sustaining price increase, the expert noted.
"Here. we're actually not really dealing with a pure situation where we're trying to slow the economy, we are ultimately trying to rebalance expectations, and the U.K. is a country that imports inflation ... So we're not effectively in a position where we’re free effectively to just focus on supply and demand," Harris added.
Instead of suppressing the consumer demand, the UK policymakers should have supported the households by extending the mortgage duration period, thereby, decreasing the debt burden on the households.
"We're in an environment where we're probably going to destroy more demand than we should have because the Bank of England and [bank's former governor] Mark Carney didn't do their job as they should have," Harris concluded.
According to Harris, many in the United Kingdom prefer short-term mortgage over the long-term obligations. That makes them more susceptible to negative effects of the rising interest rate, which the UK government employed to tackle soaring inflation, notably growing households’ spending on mortgage, which is rising concurrently to the interest rate.
The Bank of England raised the interest rate by a quarter of a percentage point on Thursday, bringing the benchmark interest rate to 1%, making it the highest since 2009. The Bank of England has increased it for the fourth consecutive time, while also predicting that inflation in the UK will grow up to 10% this year as soaring food and energy prices are exacerbated by the Ukrainian crisis.