I cannot recall how many times I have said that UK interest rates, as set by the Bank of England, are too high. Now, the FT has agreed. In an editorial this morning, they say:
Current interest rates are too restrictive. Financial markets are pricing in around three further 25bp cuts before the end of the year. But, given sluggish economic activity, the BoE may need to go further, faster. Indeed, with most UK mortgages agreed at a fixed rate, it will take time for any rate cuts to improve consumers' cash flow.
Despite that, they suggest caution - because of the risks of an uncertain world. I think they overstate those risks, but I have to agree with their conclusion, which is:
Importantly, though, [whilst] lower rates would prop up Britain's sagging economy — and reduce government borrowing costs — it would only soften the symptoms of a deeper malaise. The onus remains on Labour, not the BoE, to reignite animal spirits and outline a fiscally credible path to higher long-term growth.
There is. no chance of that happening with Starmer and RTeeves in charge. And that's why the mess will continue.
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Andrew Bailey has been allowed to lord it for too long. He should be dismissed and Labour needs to do its job and remember that the bank serves it.
Otherwise, why does it remain nationalised?
Lower base rates are one thing but lowering them doesn’t lower the term structure of interest rates. Would you therefore advocate a return to aggressive QE to lower longer dated interest rates?
QE is not required.
Cancelling QT is.
Tiered rates are.
Stopping pretending the government needs to borrow is.
Why do unnecessary things like QE?
Albeit the FT probably mean a pro-business, anti-government spending path.
I hope this is not off-topic – it is to do with interest rates. I had a discussion on “subsides” with a German accountant on Sunday. He claimed that govs offering low interest rates to e.g. an important industry was a “subsidy”. What follows takes a closer look at this:
Interest Rates 1: Reality: if I have a project (e.g. RES – on-shore wind) the interest rate I pay will be a function of the risk profile of the project – including which country, who is the counterparty etc. Thus commercial interest rates vary – depending.
Interest Rates 2: Government decides that project XZY (nuclear? PV? wind? EV manufacture? … take yer pick) is a priority & decides to fund an investment @ interest rate A.
Thus in the same way that banks evaluate a given project based on the risk profile, a country could decide that the risk/benefit profile of Project XYZ deserves an interest rate A.
Interest rate A might be lower than that which banks would fund the project (if they would fund it at all).
Is this a “subsidy”? Or is it an investment, by a gov, in an asset that would otherwise not be funded or funded at a rate that perhaps means it would not be built.
For the gov’ given money creation costs nothing – why not fund projects that would otherwise not be funded? Claim: low interest rates from gov are “subsidies”. But interest rates for any project are always based on risk/reward profiles. It follows that govs will have diff risk/reward profiles to the private sector.
Given the above, accusing the Chinese gov of “subsidies” wrt their industries clouds the issue – they give low interest loans – probably based on the risk profile they are happy with.
I have to say, so what? Government is not business. There is no need to compare them.
A govt giving a business a grant or a below market rate loan is a subsidy. We could do that as unlike Germany we aren’t in the EU. However, I don’t think that is a sensible approach. The BofE should reduce the bank rate now to boost all investment
In response to Mr Voce: “A govt giving a business a grant or a below market rate loan is a subsidy” what is the “market rate”. Becuase it depends on the risk (& perhaps opportunity) profile. Which was one of the points I was making. There is a base rate, set by the BoE – but the “market rate” – what does that mean?
In response to Richard: I agree gov is not a business. But if it takes over e.g. Thames Water what does it then do with respect to making the investments needed to deliver a societal good (clean rivers)? If it makes money available what interest rate (if any?) should it charge? One could then extend the point/argument to a range of other areas (public transport? health? etc)..
The Treasury does charge interest to public sector projects. The last time I looked the rate was ridiculously high.
“the rate was ridiculously high”……begging the question (there are so many) – why?
If the money invested comes from bond sales – arguably the rate is the bond rate, if it is not from bonds (BoE – Treasury) then it has no cost. In the case of health, with an economic multiplier, one could argue for a zero rate since the investment will, over time, generate a tax multiple.
As per usual the BoE is way behind the curve. Especially Catherine L Mann, even if she did vote for a 0.5 cut last Thursday. It’s as though she had an ‘oops, sorry’ moment
Simon Slade
Indeed. I was gobsmacked too, to read that Catherine Mann was one of the two MPC votes for a 0.5% cut. Maybe as you say, oops sorry, or a road-to Damascus epiphany. Or something more devious.
On the subject of interest rates, the issue quickly becomes defending the value of the pound.
My response to Trump would be to let the pound devalue against the dollar.
This would make exports cheaper and imports for the uk more expensive.
This is what the uk should have done in1976 at the time of the IMF loan crisis.
Interest rates do not determine exchange rates for long. Actual trades always do that in the end of the day.
Listening to some of the statements, claims, prognostications (? – or whatever) of so many of these ‘experts’ and members of ‘policy committees’ and the like… continues regularly to confirm my impression that the ‘science’ of economics and most economists are still working in the way that medics did in the 17th or 18th century, when bleeding was commonly used and they were mostly ignorant of the complex systems of the human body and how it actually works. No wonder we have the gangrenous limb of long-term unemployment, the lop-sided gait of inequality and the cancerous growth of extractive finance and ‘shareholder value’. And we shall shortly be gasping for breath, in global heating and ecological crises.
How much influence does the BOE have over exchange rates?
As i understand it they intervene to stabilise or not ( in the case of Liz Truss) levels.
Which they fund out of hot money attracted by high short term interest rates.
In the very short term they can have an influence
But I stress, it is very short term
One of her arguments a few months back was the defence of the pound. Increase cost of imports = increase in costs = increase in inflation etc
But like so many off her claims, that one has little evidence to support it
Richard
To what do you attribute the much higher rate of interest in the UK?
I always understood it to be to attract hot money to sustain the exchange rate, to prevent devaluation .
Which has been a totem of government competence since Harold Wilson.
If the interest rates were pegged to European rates therefore the pound would fall and the UK would become more competitive on world markets.
It would create inflation but only as a once off adjustment.
I think it has very little to do with exchange rates – the Bank of England know that these are not heavily influenced by rates in the long term. Trade does that.
Inflation is all they worry about.
There is a video coming on Sunday…
I was at a BoE ‘public panel’ on Monday evening. About 60 people in the room, eight per table with a rapporteur from the Bank. How they recruited people I don’t know,vwe ranged from students to retirees, some people in various jobs or businesses; but (in Sheffield) a lack of diversity, low numbers of BAME/PoC…
The principal BoE representative was the above-mentioned Catherine L Mann, who indeed said she had ‘changed her mind’ (polite self-excusatory form of “Oh, gosh, sorry”?) because of the weak signals in the economy. And briefly hinted also “Sorry, some people are going to lose their jobs.”
The BoE really had very little useful to say, other than a brief and dull explanation of their duties and committees. The Q&A was very limited: and in response to questions about why interest rate cuts are effective or not, more or less admitted that actually they can’t really stimulate the economy (but no discussion of the inverse, that why therefore is it claimed that increased rates cool an overheating economy and control inflation: no mention of the role of money supply nor taxation, nor QE/QT).
Unfortunately I wasn’t able to put my question(s) about CBRA interest or the Bank’s mandate just to target inflation, amongst other things!
It seemed the main aim was to hear the views of “ordinary people” about trends and experiences re the cost of living, saving/spending and feelings of in/security, financially.
The BoE want us to know that they’re listening, our opinions are heard when they take their decisions… blablabla.
The buffet was modest, though not too unhealthy. But I think the BoE didn’t plan that, they just paid for it.
Good you went
Thank you for your feedback.
Colin McCullough:
What you say reflects the experience I have had at BoE forums in Bristol. Minimal explanation of Bank policy and little opportunity to ask questions. Mainly seeking people’s opinions on cost of living etc. Huw Pill replied to someone’s question about MMT with a superficial, arrogant dismissal. I did however get a chance to have a brief,quiet, approving word to Swati Dingrha afterwards. I declined to attend the most recent one, although in my experience the buffet was absolutely outstanding on both occasions
They know how to buy sandwiches then….
Thanks, Adrian.
As regards ability to buy sandwiches… This evening I attended another event, a reception for the 10th anniversary of Hope For The Future, in exactly the same venue, the same room… but a much better buffet!
Perhaps the BoE had set a budget in nominal cash terms and are themselves suffering from cost inflation (or ‘shrinkflation’!)?