The great interest rate debate (revisited)

Tony Ward

September 5, 2016

Bank of England

Tony Ward is chief executive of Clayton Euro Risk

I know I said I wouldn’t return to this topic…but I just can’t help myself.

Regular blog readers will know how I feel about the Bank of England’s recent decision to cut bank rate to 0.25%. They will also be aware of how strongly I feel about future decisions to lower the rate further – what minimal impact this policy actually has and how little room is left for Mark Carney to manoeuvre. Realistically only a single cut remains on the basis that the bank has ruled out negative interest rates. Good job, too. And what has the latest cut achieved anyway? The jury remains well and truly out on that one. At best, it may have boosted market confidence.

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Many commentators now seem to be agreeing with me. In an article in this weekend’s press, Andrew Sentance, former-MPC member and senior economic adviser to PwC, concurs with my view, even going so far as to suggest that low interest rates are now doing more harm than good. Following the Bank of England’s latest ‘stimulus package’, it is apparent that long-term investors can no longer protect themselves against inflation by buying government bonds as 10-year and 20-year UK government bonds now offer  paltry cash returns. To put things into perspective, these are the lowest returns ever seen in the UK – and this is doing untold damage to pensions. PwC suggest that there are ever-increasing deficits in Britain’s 6,000 final-salary pension schemes, up another £100bn in a month to £700bn.

It would seem the default position for central banks to deal with ‘negative shocks’ is still to find ways to provide monetary stimulus. I agree with Andrew Sentance, who suggests that when low interest rates and QE were first deployed in the UK, they were seen as temporary policies to get us out of a difficult situation created by the financial crisis. Now they seem to be the norm – not just in the UK but internationally, with the exception of the US.

My plea is that before decisions by the Bank of England are made, we take proper stock of where the economy sits post-Brexit before reverting to further ‘stimulus’. Recent surveys, including PMI data for manufacturing and construction, were certainly more positive than many commentators had envisaged. Retail sales remain high as does consumer confidence. Having said this, I’m not complacent and certainly think there will be more wobbles to come. Of course, business sentiment remains key.

I would call on government to assess fiscal policy. There is much riding on what the Chancellor Philip Hammond announces in this autumn’s statement. A round of spending on infrastructure would certainly be helpful – and not just a focus on the headline-grabbing big projects but smaller ones that can begin now.

A rounded approach and more innovative thinking are certainly needed.

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