No free lunch if bank rate rises

AS A mere physicist but one who gleaned some economics 50 years ago in Geneva from JM Keynes’ last research assistant at the Treasury (and that in Welsh), I do not share Michael Phelps view that national deficits (and debts) are irrelevant in the current abnormal times (Western Mail letters, June 7).

Following the financial crash of 2008/09 the UK was faced with the need to rescue the banks and a 6% fall in the GDP.

This was done by quantitative easing (QE).

The Bank of England acting for the Treasury creates funds to buy back government debt from financial institutions.

The interest paid by the Bank on these acquired assets is the bank rate now at 0.1%.

Globally QE has lowered interest rates and flooded banks with cash so as to avoid an economic slump.

So, during the covid crisis (with its 10% fall in GDP), the UK debt about equals its £2,200bn GDP of which 42% is the result of QE. This has reduced the UK annual debt interest payment from £39bn to £22bn.

Fine you may say, but the consequences of QE range from the rich getting richer and the poor poorer, to Liberty Steel in Newport.

And now there is a further danger – whatever economists say, markets are signalling that interest rate is going to rise.

Should bank rate increase to 3% (quite normal in the past) then the UK annual debt interest bill would increase by £60bn – no free lunch then!

Edgar Jones, Gwaun-Cae-Gurwen born, whose career began as a 14-year-old miner at a hard coal face, ended as the head of the Geneva Office of the IMF.

What would be his advice today?