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UK Low-Interest Rate Era Far From Over
World Economy

UK Low-Interest Rate Era Far From Over

It is a safe bet that Britain’s rock-bottom interest rates are going to stay at rock bottom, this year and next. That is the message from the global economy, where all the signs point to low inflation for years to come, robbing central banks of any reason to raise the base rates that set the benchmark for mortgages, overdrafts and loans.
Some central banks might even be forced to pump more funds into their economies through those inelegantly titled quantitative-easing programs just to keep inflation from sinking again into negative territory, Yahoo News reported.
Even were Bank of England governor Mark Carney able to save some face by announcing, say next February, that the Bank of England’s monetary policy committee had voted to increase base rate from 0.5% to 0.75%, subsequent rises currently forecast for the rest of 2016–to around 2% to 2.5%–could be delayed for several years. It is possible he may finish his five-year term in 2018 without once raising rates.
A look at the broad sweep of economic activity in the UK provides all the reasons needed to keep the tap of cheap credit flowing. Inflation for July is expected to be zero when the official figure is published this week–a long way from the 2% target Carney is supposed to have in his sights. With the return of ultra-low oil prices in recent months, inflation could even be negative.
The MPC might say it expects inflation to be higher in a couple of years, justifying a rate rise sooner. It will also point to the pressure on wages (and therefore inflation) from the economic miracle of the last few years that has created almost two million jobs.
Of course, a high rate of employment is not to be dismissed. The problem for the MPC is that it has brought little in the way of wage pressure, except in certain sectors of the economy where skills shortages are emerging.
Moreover, we hear little about how industrial production still remains 10% below its previous peak (in January 2008); that real average earnings have only recovered to their August 2004 level; and that to buy a sofa or car millions of households remain so strapped for cash they must take out a loan.
According to the office for budget responsibility, household debt is ratcheting upwards to a new peak of 183% of GDP in 2020, surpassing the credit-boom years of 2005-08 when it reached 175%.

 

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