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Sancho Panza

The Perils Of Keeping Interest Rates So Low-Andrew Sentance

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Telegraph 6/11/15

'This week’s Inflation Report press conference saw the Bank of England shifting its position on interest rate rises again. Over the summer, Mark Carney stated that the decision to raise rates would be actively considered by the Monetary Policy Committee (MPC) “around the turn of the year”. It now appears that the “turn of the year” which the Governor is considering is the end of 2016, not 2015. Once again, the decision to raise interest rates is receding into the distance.

If this projection is correct, the current period of 0.5pc interest rates will extend to nearly eight years. That will be the longest peacetime period of constant low interest rates since before the First World War. In the 1930s, the Bank Rate was held at 2pc for seven years from 1932 until 1939. We have already established a post-war record for a period of low interest rates, surpassing the six years and two months of 2pc interest rates from 1945 to 1951. This is turning out to be a most exceptional and unusual period for UK monetary policy – with the official Bank Rate now expected to be kept at its lowest level in recorded history for the best part of a decade.

At Thursday’s press conference, Carney gave two reasons for delaying consideration of a rate rise until the end of next year – uncertainty about the growth of the global economy and the forecast that inflation was now expected to remain “lower for longer”.

The MPC continues to take its interest rate decisions based on the short-term growth and inflation outlook. This approach may have been appropriate when 0.5pc interest rates were expected to be a short-term palliative for the economy, in 2009-10. But now we are into the seventh year of economic recovery. These short-term concerns about growth and inflation need to be weighed up against the longer-term consequences of exceptionally low borrowing costs.

I believe this prolonged period of record low interest rates is creating four economic problems.

The first is the effect on the UK housing market. UK house prices continue to rise faster than wages, increasing the problems first-time buyers face in getting onto the housing ladder. This week, Halifax reported that their house price index was nearly 10pc up on a year ago. Other indicators show less dramatic increases in house prices – the official measure published by the Office for National Statistics is just over 5pc and Nationwide is reporting just under 4pc. But all these figures are ahead of average wage growth across the economy of 3pc and consumer price inflation of zero.

The Bank for International Settlements has repeatedly warned that a prolonged period of low interest rates would inflate asset bubbles in other markets. In the UK, this exceptional era of very low borrowing costs appears to be inflating a house price bubble.

The second adverse long-term impact of very low interest rates is on the incentive for individuals to save. Keeping the official interest rate at 0.5pc has pushed the returns on normal savings and deposit accounts close to zero. Even if savers are willing to tie up their money for one to two years, they are unlikely to get a return much above 1pc now. This is sending exactly the wrong signal to a younger generation which needs to save more for their retirement, as they are likely to live longer than their parents and grandparents.

The “spend more, save less” mentality is being reinforced by this long era of low interest rates.

Low saving could also constrain productive investment. The Government – quite rightly – believes we need to invest more in infrastructure and other wealth-creating capital projects. But this programme of investment cannot be financed sustainably unless there is a flow of savings to fund it.

This problem is not unique to the UK. In the US, the Federal Reserve has also put off a difficult interest rate rise decision for short-term tactical reasons

The third adverse impact of keeping the official Bank of England interest rate at 0.5pc is on economic confidence.

In the period before the financial crisis, central banks were key anchors of economic and financial stability. In the UK, the ability of the Bank of England to steer the economy through turbulent times underpinned business and financial confidence.

Now that the Bank of England appears to be backing away from difficult decisions, its credibility risks being eroded.

Just over two years ago, the Bank’s “forward guidance” was that once unemployment fell below 7pc, interest rate rises would be on the agenda. When unemployment very quickly dropped below this threshold, the guidance was amended and no serious consideration was given to raising interest rates. The emphasis shifted to a wider range of economic indicators. Now these wider indicators are pointing to a tightening labour market. The Bank of England’s own agents are reporting the highest level of recruitment difficulties for at least 10 years, yet the MPC finds it difficult to support a small rise from an exceptionally low level of rates.

This problem is not unique to the UK. In the US, the Federal Reserve has also put off a difficult interest rate rise decision for short-term tactical reasons. The lions at the heart of our financial system appear to have lost their roar.

As we know on a personal level, putting off awkward decisions normally makes life more problematic over the long term, not easier. There is now a significant risk that confidence and credibility associated with central banks before the financial crisis will be eroded and dissipated.

The fourth adverse impact from current Bank of England monetary policy is that the first interest rate rise after the financial crisis is likely to be a bigger shock, the longer it is delayed. There are two reasons for this. The longer the first rate rise is put off, the more momentous it becomes – with a potential adverse shock to confidence. But there is also the risk that the delay in raising interest rates leads a bigger and sharper rise as the MPC tries to catch up from being behind the curve.

Putting off raising interest rates may appear to be the easier course for the MPC at present. But this long period of exceptionally low interest rates is building up economic problems for the future.

Andrew Sentance is senior economic adviser at PwC, and a former member of the MPC'

And how many times did he say all this and push for a rate rise whilst on the MPC?

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And how many times did he say all this and push for a rate rise whilst on the MPC?

Money Puppets Cental are the problem.

They just have to keep bullshitting and spinning their version of events to hide the fact they have created this mess and in the process outpriced millions of jobs and whole industries with their bubble making policies that just so happen to allow their mates - other banks and the politicians in particular to gorge themselves on the proceeds of loose monetary policy creating high debts loads and high values in property.

Edited by onlyme2

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Carney = boomer

No he's not, Carney was born in 1965 which is early Generation X, same as Cameron.

The Boomers are no longer in positions of power by and large (Blair and Brown were the Boomer PMs) but the early GenX leaders have decided to carry on with the status quo.

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No he's not, Carney was born in 1965 which is early Generation X, same as Cameron.

The Boomers are no longer in positions of power by and large (Blair and Brown were the Boomer PMs) but the early GenX leaders have decided to carry on with the status quo.

UK baby boom continued until late 1960s, much later than the American definition.

But being a Canadian may of course complicate matters.

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UK baby boom continued until late 1960s, much later than the American definition.

But being a Canadian may of course complicate matters.

There were really 2 baby booms in the UK, a sharp one immediately postwar which quickly died down (due to postwar austerity?) and another which peaked in the 1960s.

Anyway I don't think it helps to get too caught up on what the birth rate was, it's more trying to roughly group people by age who experienced similar social and economic conditions at the same life stage.

For example, if you define Boomers as people born 1945-1960ish then they were young adults in the late 1960s and 1970s when unemployment was low, homeownership was rapidly increasing and wage inflation quickly eroded mortgage debts. This is why people born in that age group cannot understand what it's like not to earn enough to buy a house.

If you define GenX as born 1964ish-1975ish this group were young adults around the time of the early 90s recession and HPC so they definitely had a different experience from the Boomers. However, they were mostly property owners in time for the Blair-Brown house price inflation and many took on big debts to buy their family home at peak prices. They have not had it anywhere near as good as the Boomers because they have paid so much more for housing, but in a way they also want house prices to stay high to justify their past decisions in life (and to keep their mortgage LTVs and interest rates low). GenX have children but they are still mostly school age or in their carefree early 20s so GenX parents have not yet figured out that their children will be poor for life unless there is a correction in house prices.

Then you have GenY born from the late 1970s to the early 90s who are basically assetless people with internet access.

Edited by Dorkins

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UK baby boom continued until late 1960s, much later than the American definition.

But being a Canadian may of course complicate matters.

But we do not mean boomer in a purely quantitative sense, but in the sense of values and outlook oftheirgeneration. In this sense, Carney is generation X.

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There is now a significant risk that confidence and credibility associated with central banks before the financial crisis will be eroded and dissipated.

Central banks credibility :lol::lol:

His own credibility hasn't been enhanced by failing to mention how crazy house prices help to devastate the general economy in his list of four economic problems.

Edited by billybong

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Central banks credibility :lol::lol:

His own credibility hasn't been enhanced by failing to mention how crazy house prices help to devastate the general economy in his list of four economic problems.

Nor how what he is covering his **** about has been the exact intent of the QE policy - to destroy returns on investments, create bubbles and put people off saving.

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Carney's age is unimportant. Politically and intellectually he's part of the Neoliberal Thought Collective (likewise Blair, Brown, Cameron and Thatcher). Corporate capitalism managed and underwritten by the State but with a heavy emphasis on globalisation and deregulation.

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UK baby boom continued until late 1960s, much later than the American definition.

But being a Canadian may of course complicate matters.

I think we ought to get this right; after all we need to know who to abuse on this board.

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appears to be.

it started 16 years ago.

the 0% rate and government backed borrowing is just a continuation of the same bubble.

it's the railway bubble all over again.

this is not going to end well yes the new middle classes who, not actually being middle class and we'll paid, have jumped at the chance of free unearned untold riches way beyond anything they could ever have earned.

but, like but previous get rich quick schemes it'll end in disaster for most people except them at the top who started it.

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I can think of 2 other bad effects of low interest rates off the top of my head and I'm not an economist:

1) Malinvestment

allied to malinvestment

2) Keeping zombies alive ie over-indebted companies/individuals/property owners(?) going when in a "normal" interest rate environment they would be dead and buried.

(Maybe this is the new normal and there won't be any interest rises.)

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Carney's age is unimportant. Politically and intellectually he's part of the Neoliberal Thought Collective (likewise Blair, Brown, Cameron and Thatcher). Corporate capitalism managed and underwritten by the State but with a heavy emphasis on globalisation and deregulation.

I disagree, I'd say the age of policymakers is extremely important now that intergenerational inequality is so high. Carney's got his house, all the members of the MPC have their houses, his boss Osborne has his house, all of their friends from school and university have their houses, in fact many of the above are multiple property owners so benefit from a bit of HPI. Even the altruistic ones who care about the priced out youngsters don't really care at the same gut level as the priced out youngsters themselves.

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Just two that stand out from the original post

The “spend more, save less” mentality is being reinforced by this long era of low interest rates.

Low saving could also constrain productive investment.

Borrowing money to invest doesn't require savings

If people are saving and not spending why would anyone invest in a new product that no one will buy?

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