In­ter­est rates rise is needed

Bank of Eng­land’s Mark Car­ney needs to make change, says John Simp­son

Belfast Telegraph - Business Telegraph - - Front Page - with John Simp­son @bel­tel_busi­ness

Bank of Eng­land gover­nor Mark Car­ney has en­joyed a rel­a­tively un­chal­lenged role since his ar­rival in Lon­don from an ear­lier se­nior role in the Cana­dian bank­ing sys­tem. His pe­riod as Gover­nor has been re­mark­able if only be­cause he has chaired the Mone­tary Pol­icy Com­mit­tee through an ex­cep­tional pe­riod of un­usu­ally low base rate for Bank of Eng­land lend­ing. The last decade has been his­toric. Af­ter years of a grad­ual build-up of ad­di­tional bank lend­ing, ul­ti­mately to un­sus­tain­able lev­els, just over 10 years ago, the crash in UK prop­erty prices and a crash in the prof­itabil­ity and man­age­ment of the bal­ance sheets of sev­eral large banks brought the UK Gov­ern­ment and the Bank of Eng­land into sup­port mech­a­nisms.

The fi­nan­cial crash of 10 years ago has now eased. Re­cov­ery is un­der way although the dam­age and wreck­age of the fall in as­set prices and the prob­lems of liv­ing with neg­a­tive eq­uity have left a se­ri­ously changed fi­nan­cial world. Smart op­er­a­tors in the com­mer­cial prop­erty mar­ket are now en­joy­ing the re­ver­sal of im­pair­ment charges to re­store bal­ance sheet vi­a­bil­ity.

Other op­er­a­tors, caught with ex­ces­sive bor­row­ing and fewer op­tions to sus­tain or re­build oper­a­tions, have re­treated.

The Bank of Eng­land must now live with the prob­lems of build­ing a more nor­mal se­ries of fi­nan­cial pres­sures. Quan­ti­ta­tive eas­ing must be re­versed and in­ter­est rates brought back to a more log­i­cal ba­sis in­flu­enced by money mar­ket forces.

Quan­ti­ta­tive eas­ing was a rel­a­tively pain­less method of try­ing to sus­tain the econ­omy at the same time as the Trea­sury was try­ing to re­duce the Gov­ern­ment bud­get deficit. The of­fi­cial pur­chase of Gov­ern­ment debt added ex­tra liq­uid­ity to the fi­nan­cial sys­tems and cre­ated a greater abil­ity for pri­vate sec­tor ex­pan­sion.

Quan­ti­ta­tive eas­ing was par­al­leled by the re­duc­tion in base rate by the Bank of Eng­land. Af­ter sev­eral decades of con­ven­tional changes in base rate where a 3% rate would have been un­usu­ally low and, ex­cep­tion­ally, a rate of over 10% was not un­known, more re­cently the Bank of Eng­land has low­ered its base rate be­low 1%, in­deed to a frac­tion of 1%, to 0.25%.

Con­tin­u­a­tion of an ar­ti­fi­cially low base rate on a man­aged ba­sis and mov­ing away from lev­els more nor­mally ex­pected by money mar­kets has been pop­u­lar. But it has car­ried a cost. For bor­row­ers who have en­joyed the cost re­duc­tions of bor­row­ing at low in­ter­est rates there are, in con­trast, other savers who have earned much less on their sav­ings. House buy­ers have en­joyed lower mort­gage re­pay­ment bills.

When (not if ) base rate is in­creased, home buy­ers us­ing mort­gage fi­nance will pay more. The prob­lem will be that ex­pec­ta­tions on the level of in­ter­est charges have been changed by the near decade of low base rate.

There is a big down­side to the fear of ris­ing in­ter­est rates. The up-com­ing gen­er­a­tion ap­proach­ing re­tire­ment have be­gun to ap­pre­ci­ate, or have been warned to ex­pect, lower lev­els of pen­sion pay­ments as pen­sion funds have seen the vul­ner­a­bil­ity to de­pre­ci­a­tion of the pen­sion fund as­sets as their earn­ing ca­pac­ity has fallen.

Across the UK many pen­sion providers are fac­ing fi­nan­cial prob­lems. Pen­sions, whether de­fined ben­e­fit or based on ac­cu­mu­lated con­tri­bu­tions, will be at lower lev­els than was rea­son­ably fore­cast 10 years ago. The in­her­ited fund­ing prob­lems for pen­sion funds are a li­a­bil­ity that has been wors­ened by the Bank of Eng­land low base rate poli­cies. Even an in­crease in base rate of 2% or 3% will not nec­es­sar­ily re­move the prob­lems.

The Mone­tary Pol­icy Com­mit­tee of the Bank is now fac­ing an un­com­fort­able but un­avoid­able choice. The sooner small in­creases in base rate are im­ple­mented, the bet­ter.

Big de­ci­sion: the Bank of Eng­land

Newspapers in English

Newspapers from UK

© PressReader. All rights reserved.