What have low interest rates done for Britain? Depressing little | Larry Elliott

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NOTThe following year marks the 30th anniversary of Black Wednesday, an important day in history. September 16, 1992 will be remembered as the day Britain was kicked out of the European exchange rate mechanism by foreign currency speculators led by George Soros.

John Major’s government sought to repel the attacks by using British reserves to buy books and by raising interest rates. The day started with official borrowing costs at 10%, but during the morning of Black Wednesday they were raised to 12% and later it was announced that they would be increased further, to 15%. , the next day.

In this case, this decision never took place because the battle to keep the pound sterling in the ERM had been lost by then. But seen through the prism of Thursday’s Bank of England decision to suspend interest rates, the contrast to today’s monetary policy could hardly be more stark.

In the late 1980s and early 1990s, policy was seen as loose when interest rates were lowered to 7.5% and tight when they stood at 15%, as they have. done for an entire year in 1989-90. When rates changed, they did so in percentage point jumps (Black Wednesday being an exception). There was no problem with the quarter point increases and there were times when borrowing costs changed on a monthly basis.

Last week, the Bank considered whether, faced with inflation expected to reach 5% by the spring, it should raise rates by 0.15 points, from 0.1% to 0.25%. He finally decided to leave it as it is, while specifying that actions were very likely in the months to come. Rates are expected to increase next year, but not that much. Interest rates have not reached 1% since the start of 2009, when aggressive cuts were adopted in the aftermath of the global financial crisis.

There have been times in the past when interest rates have been kept low for a long time. Between 1932 and 1951, the only time borrowing costs exceeded 2% was in the period immediately following the outbreak of World War II, and even then the trend quickly reversed.

It was not difficult to find positive benefits in this policy of cheap money. Low interest rates spurred a private sector real estate boom in the 1930s, made it cheaper to finance the cost of war, and allowed the postwar Labor government to finance the welfare state.

So the question is this? If, as seems very likely, low interest rates persist through the middle of the decade and beyond, what have been the benefits? Not a higher growth rate, that’s for sure. The Bank estimates that the economy will grow 7% this year and 5% next year but this is only a catching-up after the 10% drop in production in 2020. Once this process is completed, the economy returns to growth of 1.5% in 2023 and 1% in 2024.

The Office for Budget Responsibility expects something similar, with average growth of around 1.5% per year between 2024 and 2026. It is not only that these are low by UK standards, they are also low by international standards. As noted by the Labor Party, based on Bank estimates, in 2023-24 Britain is on track to have the lowest growth rate of any country in the rich country club of Organization for Economic Co-operation and Development, except Japan. Bridget Phillipson, the shadow chief secretary of the Treasury, has said that after more than a decade of Tory rule, Britain is a high growth, low growth economy. Free market think tanks make the same point.

Of course, there are those who would say slower growth is something to welcome rather than lament, because making a gross domestic product fetish is why the eyes of the world are on Glasgow for a deal. on climate change. The point is, however, that the government is not pursuing a non-growth or degrowth program. The Prime Minister and Chancellor talk about a vibrant, sustainable and high-growth economy, but the reality is Britain has the highest taxes since Clement Attlee was Prime Minister, coupled with interest rates yet lower than in the 1930s and 1940s, and not much to show for it.

It might be too dark. The current low interest rate is not just a British phenomenon, as across the developed world the level of borrowing costs consistent with low inflation has fallen markedly, despite the increase in the cost of living caused mainly by rising energy prices.

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Britain is doing quite well in some of the industries of the future – green tech startups, genomics, artificial intelligence, for example – and will be better placed than rival countries to exploit the opportunities offered by the Fourth Industrial Revolution.

But it is clear that British scientific excellence takes a long time to bear fruit. If, after 15 years of ultra-low interest rates and nearly a trillion pounds of quantitative easing, the economy is growing only 1% a year, this suggests that the small, high-tech startups there are. has a decade fail to realize their full potential. . It is depressing to think that the stimulus measures provided by the Bank of England since the end of 2008 have done much more to boost house prices than to stimulate business investment.

When asked if the stimulus of the past decade was worth it, policymakers normally retreat to the “what if” argument. Look at the counterfactual, they say. Growth would have been weaker and unemployment lines longer if we hadn’t kept our feet on the ground. It may be true, but it doesn’t mean much.


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