Low interest rates are destroying our economy

Our ultra-low interest rates are not just shafting savers, they're ruining Britain's economy too.

We've written a lot here about the failure of the corporate world to invest. There have been a few attempts recently to suggest the problem isn't that bad after all (subscribers can read a lot on this in last week's roundtable).But most of the numbers economists look at suggest that business investment is still very low indeed. Why?

We are strong supporters of the story Andrew Smithers tells in his new book Road to Recovery. To him, the main problem relates to executive compensation if we incentivise them to keep short term profits up (by paying them in share options) we also incentivise them not to do any of the things that might reduce short term profits investing in new capital equipment being the obvious one.

But more recently we have also argued that low interest rates themselves prevent investment. That's partly because of their effect on the liability calculations for final salary pension funds (see my post on this here). But having interest rates at a 300-year low might also be bad for confidence in general.

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A note from the managers of the WDB Oriel UK Fund puts it like this: "As long as monetary policy is artificial, the climate for corporate investment remains sufficiently uncertain that companies seem deterred from committing capital; much easier, in the event of demand growth, to add capacity via additional labour especially in those jurisdictions where hiring and firing is relatively unconstrained by legislative diktat. Perhaps this explains the strength of private sector employment co-incident with continuing pronounced weakness in corporate investment."

Take this a bit further and you see that as long as interest rates remain so low that a nervous corporate sector eschews investment, capital will remain plentiful, thereby underpinning equity and house prices.

However "the key intent of monetary policy sustained, balanced economic growth" will remain elusive.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.