Ask us anything: What will interest rates be in 2/5 years?

0:01You know what I love, Damo? Things that save me time. You don't have YouTube Premium, mate, so I just don't believe that. Granted, I'll give you that one. However, I've got one for you. A great time saver in personal finance is Money Week magazine. They spend a lot of time distilling the biggest stories in personal finance down into consumable chunks, so you don't have to scroll and scroll. They give practical tips on savings, investments, pensions, the UK economy, the global economy. It's like your five a day, but for finance. If you want to give Money Week a try, you can get six issues in print and the app absolutely free by visiting moneyweek.com forward slash money.

0:34After your trial, you'll save an extra five pound a quarter on the subscription, which is exclusive to Making Money listeners. And that's moneyweek.com forward slash money. But there's a link in the description if you just want to click that.

0:49Welcome to our mini episodes where we answer your biggest questions about money. Like we said last week, we're going back to our full length episodes next month and we've got some amazing guests lined up, including Deborah Meaden. Did Did I mention Debra Meadens on the podcast? Been dropping that name all over the floor, haven't we, T? Casually dropping it to my mum's friends. They all love it. But in the meantime, we're working our way through the mountain of questions that you guys have sent in. So, Damo, what have we got on the cards today? Well, T, I'm going to put you to the test today because we're going to talk about something that's rarely out of the headlines, and that is interest rates.

1:24Fantastic. I'm screwed. I think we all are, mate. So do you want to read Andy's question, first of all? Sure. Cheers, Andy. Andy says, wages are driving inflation, as Vishi keeps saying. If you take out mega CEO pay rises, is this really the case? I'll let you take this one too. Well, in my past experience, no. Go on, mate. Here's the ball, mate. Run with it. Go on. Yes, I'm the captain now. It's my show. So basically, what I want to tell you about interest rates, I don't have any idea what I would tell you about interest rates. I would give you some bad advice on internet. Things are getting more expensive.

2:01How's that? Yeah, decent, decent. Good observation for sure. Okay, so I don't like the way that Rishi's blaming inflation on people's wages. It's kind of like saying that small boats are to blame for the country's problems. It's more of a secondary effect to a larger issue, if you will. So what caused inflation initially was money printing in response to COVID, and then mix that in with energy and supply shocks due to the pandemic and Russia's invasion of Ukraine. Now, it is true that if you give people more money, they spend that money and that leads to inflation. It's that whole thing of like, if everyone had a million pounds, no one's rich, if that makes sense, because everyone's now got the same increased spending power.

2:43But that's a very simple way to look at it. And for him to go, oh, increased wages are causing inflation, I think is quite a simplistic view. I think one example that we can point towards that he's probably highlighting is core inflation. So core inflation is inflation or the inflation measure after you strip out food and energy, which are the more volatile components of the inflation. And a lot of the core inflation in the UK is the service industry. Most of us work in services, financial services, whatever. And the biggest cost for service-based businesses is their staff costs, paying the wages.

3:24So what Rishi might be alluding to is the fact that as prices have gone up, service-based industries have had pressure from their staff to increase their wages. They've increased the wages. And then that's basically meant that those service-based businesses have put up their prices again. They call it a wage price spiral, but I'm reluctant to call it that because I think it's the other way around. so prices went up first people rightfully said hold on our wages have been flat in real terms for the last decade or so and now prices have gone up 20 percent in the last couple of years we need a pay rise they get the pay rise and then that means again that the service-based industries go oh well we put our prices up again and I think that's probably what he means when he says that yes in a true sense giving people more money increases inflation but I think it's looking at a secondary factor in the same way with small boats.

4:17It's like, you know, the immigration system in this country is probably broken and that's leading to more people pushing boats into the sea. The small boats aren't the reason the immigration system is broken. Does that make sense? Definitely. I mean, that was definitely better analysis than I could have given. I remember that when my kid got born, there was like all the nurses and doctors were going on strike so you hear my chain jangling in the background uh you could hear all the doctors yeah inflation ain't hit the carolet home has it got a chain swinging gold's a good good store of value mate that's it it's an investment and it also looks good um no but all the doctors and nurses were on strike um and we were worried because we're like is there going to be anyone to look after our baby and we were there for like uh quite a while in the hospital and you start talking to the midwives and nurses and they're like like the reason they're all on strike is because their wages weren't keeping up with inflation.

5:08They were all, there's some of them saying, if I was a cleaner, I would make more money. If I was at home, I would make more money. So that's kind of what really brought it to light for me. Like the nurses were saying they were making less than if they got other jobs. And you think of nurses are pretty good jobs. It's a joke, mate. It is a joke. The thing is with public services, they're hard jobs. Like being a doctor and a nurse is a hard job. And to say that those jobs aren't then paid well, Why would you do it? You know, you're basically just relying on people being saints and that's not fair.

5:40And it's high stress as well. Like, yeah, they've got to life in their situations. Long hours, high stress, dealing with death and shite, like literally. I can't even pay people with my parking tickets and they've got to worry about someone's life. So yeah, I feel for them. So, you know, I'm answering the question from two perspectives. There's the economic perspective of if you give everyone more money, it will cause inflation. Rishi's leaning on that, but in reality, it's a bit like you're focusing on one little component. There's a lot of other things that caused inflation before the wages did.

6:12But then there's the human element of you have to pay people in line with inflation, otherwise their living standards go backwards. And maybe if over the last decade or so, real incomes had kept up with inflation, we would be okay. You know, in the terms of if people's incomes haven't been going backwards. But since 2008, people's real incomes have been going backwards anyway. and now we've had the inflation problem. So it's even worse. It's a bitter pill to swallow, isn't it? When a guy's telling you, oh, you getting more money's causing inflation, but his missus just signed a contract with, you know, BP or whatever for an extra billion pounds.

6:48And it's like, what? Yeah, that part of the problem. How much inflation is that causing, Rishi? Well, I hope we answered your question, Andy. The next one's, oh. Go on, no, read it. You don't do much else. Yeah, so the next question that James wrote to us, charming guy, wrote, love the podcast and the YouTube channel, taught me loads. And I work in asset management. So we're teaching all big and small. Rather than raising interest rates with all the bad consequences and indiscriminate nature of them, why doesn't the government raise taxes? It doesn't need to spend the money. it could use it to pay down debt or store it for when inflation is lower and thus not risk keeping inflation higher for longer.

7:34Okay. First of all, you know - I'll take that one, Damo, since you're tongue-tied. Go on, Ned. She's like, I've got to carry all the weight on my shoulders all the time. This is heavy, man. It's heavy. So basically, I think rich people don't pay taxes. I mean, I know a lot of rich people. I know a lot of rich people and I'm going to keep it 100. Like, let's start with the corporation so no one gets offended. Starbucks and all these big companies, they don't pay their full taxes if they pay any. Like I saw there was an article a couple of years ago, Starbucks tax bill was like 100 pounds. It was lower than my tax bill.

8:07And I was like, how is that possible? You guys are making so much money. But then you also look at the high net worth individuals. And let me not tell any too many secrets before they get a hit put out on me or something. But basically, rich people do all the legal tax breaks. And then once they've exhausted all the like legal ways of avoiding money, some of them do some illegal ways to avoid paying tax. Basically, I think that the rich people aren't paying enough taxes. And it's really annoying because I intend to be very rich. I think I'm already quite well off, but I'm paying taxes. OK, so I don't see why people who have more money than me aren't paying more taxes or at least the same as me.

8:46Or like, yeah, I think it should be proportional. What do you think, Damien? so the one issue i've got with like the tax the rich narrative i think you're right it's got to be taxed as super rich right because i see a lot of people bash people over the head with like 100 grand a year incomes yeah they should be taxed loads more you know people people on 20 grand a year and people on 120 grand a year have far more in common with each other than someone on 120 and a billion do you know i mean like they're out in a different league aren't they um and it seems like when we say raise taxes, it's actually just the middle to high earners that get punished.

9:24And I don't think that that's very fair. I think they pay quite a lot in tax anyway. I think 40 % tax bans and all of this stuff. It's insane, isn't it? 40%. And yeah, it's - Yeah, and higher. And then you just lose 40%, then you're no longer a millionaire. I'd be like, I'd be gutted. I'd be like, I just made my first million and then like, and there's 40%. I'm like, and now I'm broke again. Well, I'm not broke, but yeah. Oh yeah, you can play solid gold violin for you, mate. Like, I'll take that half a million quid off your hands. You can have half of that as well. But no, I think it's also worth pointing out that they probably already have increased taxes in a way.

9:58So through a concept called fiscal drag, people will remember, or they might not, that the government chose not to increase the tax allowances or the tax bans, which meant that as people got paid more through wage increases, more people were pushed into higher tax rates. I've got the data here that shows the number of additional higher rate taxpayers will increase by 55 % to 862 ,000 people. So those people have been paid more and are now being taxed more as a result of taxes not moving. So they are paying more tax. And if you consider as well, once we adjust for inflation, so the real impact on their wages, a lot of these people will actually be getting paid less even though they've had pay rises because their wages haven't gone up in line with inflation and they've been taxed higher amounts on the proportion that has gone up.

10:52So they have increased taxes, they just haven't increased taxes. So a lot of economists seem to think that monetary policy is more effective than fiscal policy. So one is interest rates in the Bank of England, the other is government spending. And basically they say that the Bank of England is a more effective way of combating inflation. that's why the focus is there. The other thing is there was arguments from economists that I saw that taxation actually makes it, there's less incentive for businesses to produce and that means that then the supply restricts and then as a result of that prices go up so it can have the opposite effect.

11:32I don't know how that works out because tax is a percentage of a gain isn't it? You know you're never paying more in tax than you earn potentially. But the point I want to put across is it's never as simple as input output with these kind of things. And there's always ripple effects. Also, that's all I got to say on that. I don't really know the answers, but I know that things aren't as simple. And I also know when we raise taxes, I think we ultimately end up punishing people that shouldn't be paying more taxes and the people who should be kind of just get away with it anyway. Yeah.

12:09next question i i want to say moz mo mo mo okay m-o-8-z-z moaz mo8s mo8s mo8s should we just have a debate on his name um where do you see interest rates setting at over the next two years and the next five years this is not a prediction do not do any financial investing based on Damo's random numbers that he pulls out of his butt. I am literally going to pull these out my arse. So yeah, I appreciate the disclaimer there, T. Historically, rates have been all over the place. If we go back over 100 years, we had like 16 % in the 80s, I think, or 15%. But the recent period in the last 14, 15 years of near zero is very unusual, historically speaking.

13:00And while we might have all got used to it, They're not normal. So I think one thing we can definitely say is that rates will be higher than zero going forwards. There you go, solid. That's solid prediction. Write that down, T. Keep it vague. The sun will rise tomorrow.

13:22So I think if you're going to hold me again to it, put like a gun to my head and something and say, where do you think we're going? I'll say that we're going to go near to 6%. We're going to hold them there for a while through 2024 to combat inflation. And then maybe in a response to the UK economy overcorrecting or us entering a recession, we'll see a decline. But I think long term, we'll probably sit like four or five years or whatever closer to 4 % than we will anything else, 4 % or 5%. Again, I'm pulling numbers out my backside. I was going to say, that's not bad. My calculations have a 5.2%.

14:00So you're pretty close to the most. What calculations are you running over there? My sources, trust me, mate. Trust me. You got your little year nine scientific calculator. You're just bashing buttons. Oh, trusty. I could make it say... Says boobless or something like this on it. Yeah, if I turn it upside down, I can make it right.

14:24What kind of topics do you want us to cover in season two of Making Money? and are there any guests you'd just love for us to have on? Let us know at makingmoneyatkindling.media or message us on Instagram. And finally, thank you so much for all the support. I really mean that. Me too. Yeah, of course you do, mate. They love you for some reason. It's because I'm the star of the show. Yeah, all right, all right. But anyway, seriously, thank you for all the love you've given us. See you next week.

14:57Thank you.