Merryn Somerset Webb
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).
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 have some 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”.