This week marks the tenth anniversary of the beginning of extreme monetary policy in the UK. On 5 July 2007 the Bank of England, convinced that inflation was about to take off, raised interest rates to 5.75%. But inflation didn't take off. A financial crisis did.
The next moves in rates were down and down again to 0.5% in 2009 and then, as part of a misjudged Brexit panic, to 0.25% by the end of last year. The last decade has seen the odd vote by a contrarian member of the MPC to raise rates, but no follow-up action. At first glance that seems nuts. After all, as the Financial Times points out, today's data looks rather "more bullish" than that of 2007. Then the unemployment rate was 5.5%, inflation was 2.5% and consumer credit was growing at a mere 4.9%. Today those numbers are 4.6%, 2.9% and 10.3%.
Given that, how can it possibly make sense for interest rates to be more than 5% lower today than the MPC thought they should be in 2007?It doesn't and most central bankers know it. The problem is that keeping interest rates so low for so long has made it hard to raise them without something nasty happening. UK household debt is near record highs. A rise in rates could lead to people cutting back on spending (good for them, bad for the economy as a whole) or to rising default rates (bad for the banks).
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Worse, it could prompt some scary moves in asset markets. It is hard to put precise numbers on how much quantitative easing and super-low interest rates have boosted stock, bond and housing markets. But we all know they have boosted them (making people feel wealthier in a time of crisis was a key reason for QE). So it is obvious a reversal of these things will result in them falling back. However, raising rates would be far from all bad. Super-low interest rates have discouraged saving; they have created horrible pension-fund deficits; they have allowed zombie companies to survive, hampering productivity; and they have exacerbated wealth inequality. If I were on the MPC I'd be voting to at the very least reverse last year's pointless cut to 0.25%.
So what should you do with your money while we wait for the actual MPC to see things our way? Keep some gold. Keep some cash. We havesome tips on how to maximise your interest income if you run a small business; David Stevenson has ideas on how to make a regular income (around 5.5%) from investing in supermarket sites; and you can read about the kind of people who can make a success of a company regardless of whether interest rates are too high or too low "intelligent fanatics".
-
What is bitcoin halving and what does it mean for crypto investors?Bitcoin halving is likely to take place this week, according to experts. Historically, this practice has caused the cryptocurrency to soar in value. But will this time be different?
-
British Airways revamps Avios scheme bringing down flight prices to £1With the new Avios part-payments scheme you can now bag a British Airways flight for as little as £1
-
Beat the cost of living crisis – go on holidayEditor's letter As inflation rages, energy bills soar and the pound tanks, what’s a good way to save money this winter? Go on holiday, says Merryn Somerset Webb.
-
How capitalism has been undermined by poor governanceEditor's letter Capitalism’s “ruthless efficiency” has been undermined by poor governance, a lack of competition and central banks’ over-enthusiastic money printing, says Andrew Van Sickle.
-
Don't be scared by economic forecastingEditor's letter The Bank of England warned last week the UK will tip into recession this year. But predictions about stockmarkets, earnings or macroeconomic trends can be safely ignored, says Andrew Van Sickle.
-
The biggest change in the last 17 years – the death of the “Greenspan put”Editor's letter Since I joined MoneyWeek 17 years ago, says John Stepek, we’ve seen a global financial crisis, a eurozone sovereign debt crisis , several Chinese growth scares, a global pandemic, and a land war in Europe. But the biggest change is the death of the “Greenspan put”.
-
The wolf returns to the eurozone’s doorEditor's letter The eurozone’s intrinsic flaws have been exposed again as investors’ fears about Italy’s ability to pay its debt sends bond yields soaring.
-
Things won't just return to normal – that's not how inflation worksEditor's letter You might think that, if inflation is indeed “transitory”, we just need to wait and everything will return to “normal”. But this is a grave misunderstanding of how inflation works, says John Stepek.
-
Car hire and the strangeness of the post-pandemic economyEditor's letter A global shortage of hire cars and unusually high hotel occupancy rates sum up the post-pandemic global economy in a nutshell, says Merryn Somerset Webb, with enhanced demand meeting restricted supply.
-
Why we need to get a grip on our governmentEditor's letter Our government is trying to do too much, enacting policies that are destructive to the private sector. It needs to drop the the feel-good nonsense and create policies that lead to long-term wealth, says Merryn Somerset Webb.
