ILC-UK: Base Rate should lie at -1%

John Hewitt Jones

September 16, 2016

Bank of England

The BoE’s decision to leave Base Rate at 0.25% bucks expectations, according to the International Longevity Centre-UK.

In a paper examining economic conditions, the thinktank applied a Taylor Rule monetary policy calculation to estimate the statistical relationship between the historic base rate and a quarter lag of inflation and unemployment.

These two economic variables explain 93% of the variation in the base rate since 1989, suggesting a strong likelihood of association.

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The analysis suggests that based on the historic relationship between economic fundamentals and the base rate, the base rate should currently sit at around -1%.

Ben Franklin, head of economics of ageing, ILC-UK, said:Central banks are at the limit of their powers.

“The critical question is not whether what central banks such as the Bank of England have done is appropriate, but what else could be done to help stimulate long-term productivity whilst ensuring that they have sufficient room to manoeuvre should a recession loom large once again.”


The ILC-UK states that while many commentators have been fixated on low interest rates in the UK, countries across the developed world are experiencing falling interest rates.

An ageing Population is also highlighted as a critical consideration given that growth among the older population is related to lower levels of inflation, or even deflation.

Yesterday the Bank of England’s Monetary Policy Committee decided to hold interest rates at 0.25%.

 

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