Many Unhappy Returns

In March 2015 a particular anniversary passed without any great fanfare:  UK interest rates have been maintained at the historically low level of 0.5% for an astonishing six years.

For those reliant on savings, it has been a pretty lean period; but for borrowers the story has been rather different.

Since the 1980s the job of monetary policy has been to manage inflation. Interest rates are raised to squeeze the amount of money chasing goods thereby bringing down price rises.

The idea is that rates are reduced again once inflation returns to target. But when the Bank of England steadily dropped rates, finally to just 0.5% in March 2009, prices were not the primary concern.

Six years ago, the Monetary Policy Committee was far less concerned about the 3% inflation than it was about economic output.  As such interest rates fell in a deliberate attempt to stimulate growth in the midst of the credit crunch.

While taking a rather liberal interpretation of their terms of reference, six years on the Bank would seem to have broadly made the right judgement.  Inflation steadily fell despite these very loose monetary conditions and growth gradually re-established itself.

‘Six years ago, the Monetary Policy Committee was far less concerned about the 3% inflation than it was about economic output. As such interest rates fell in a deliberate attempt to stimulate growth.’

As the economy has returned to health, attention has naturally turned again to the question of whether rates could or should rise to more ‘normal’ levels.  Well, this might have been expected when Governor Mark Carney took over the helm of the Bank of England a little under two years ago; indeed he signalled that very possibility.

But today, inflation itself stands at an historic low of 0%.

And it is deflation not a new wave of price rises which concern policymakers.

The very low interest rate environment seems set to remain with us for some time to come and Carney has even suggested that rates could be cut further.  Investors in need of income will have to look elsewhere.