almost 2 years ago • 1 min
UK households currently have three times as much money in their savings accounts (pink line) as they do in floating-rate mortgages (black line). On the face of it, that seems like a good thing: it suggests homeowners will make more on their savings than they’ll pay on their mortgage, leaving them with extra cash to spend.
But the Bank of England (BoE) doesn’t want Brits to keep spending: that’s a surefire way to push already record-high inflation even higher. And if they do, the central bank may have no choice but to raise interest rates higher and faster than expected. That wouldn’t be good news for the country’s economy: higher rates mean higher financing costs for companies, which could encourage them to, say, cancel expansion plans, or even lay off staff.
This once again highlights the tricky balancing act for central banks all over the world: they need to raise rates significantly enough that consumers will reduce their spending, but not so significantly that they derail economic growth. That’s why the UK, the US, and a laundry list of other major economies are all at risk of falling into “stagflation”. Until we’re out of the woods, remember: stay defensive, cautious, and focus on not losing money.
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