Forget negative rates – the Bank of England should admit it’s hit rock bottom

Third, the less interest deposits yield, the more an individual needs to save in order to sustain a given income. In a low interest rate environment, everyone draws in their horns. Negative rates are likely to be even worse. These factors all tend to slow economic activity.

Little or no inflation also acts as a brake on the economic recovery. People tend to postpone spending if they are not worried about prices rising. Indeed, the rise of online shopping has led to acute competition that has resulted in the prices of some goods falling.

Low interest rates increase the value of capital assets like property or shares. The equity markets have indeed produced good returns since interest rates were slashed over a decade ago. Unfortunately this has widened the gulf between the “haves” and “have nots”.

The one group that does benefit from low interest rates is borrowers. Since our Government is now borrowing on a larger scale than ever before, it is fortunate that the interest it has to pay is less by an order of magnitude than would otherwise have been the case.

It is time for the central banks of the US, Canada, Japan and the EU, as well as the Bank of England, which are all supposed to be independent of their respective governments, to send a signal that the next interest rates move will be towards a gradual increase. (Co-ordination is needed to avoid a risk of disruptive competitive devaluation.)

This signal would reverse the trends outlined above, and may also, contrary to conventional theory, encourage a modest revival of inflation. This itself would be welcome as inflation is the best way of reducing national debts.

Another benefit of modest increases in interest rates would be to make banking more profitable. This is necessary. Profitable banks are more secure and increasingly likely to lend money to those businesses that need it.

A vicious cycle could be turned into a virtuous one.

Sir Martin Jacomb, is a former vice-chairman Kleinwort Benson and former deputy chairman of Barclays

Source Article