DIY Investor Magazine
/
2015 Issue
39
A particular anniversary passed this month without
any great fanfare: yes 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.
MANY UNHAPPY RETURNS
SIX YEARS AGO, THE MONETARY POLICY COMMITTEE
WAS FAR LESS CONCERNED ABOUT THE 3%
INFLATION THAN IT WAS ABOUT ECONOMIC OUTPUT.
Inflation steadily fell despite these very loose monetary
conditions and growth gradually re-established itself.
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 just 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.
