By: Dr Mike Campbell
The Monetary Policy Committee of the Bank of England has decided to leave UK interest rates unchanged. The rate of 0.5% has now been in place for 30 months. The purpose of the policy is to keep the cost of borrowing low to enable businesses to expand, thereby providing a stimulus to growth within the UK economy. A similar policy is in force at most of the world’s central banks. It has to be said that the policy has hardly been a runaway success. The global economy remains very sluggish, but is at least putting on anaemic growth. It is probable that without such measures, the global financial crisis and the resulting recession would have lasted longer and been more bloody.
Much the same story unfolded at the European Central bank this week with the decision taken to hold rates at 1.5% for a second month. ECB rates have risen from 1% in a bid to curb inflation within the Eurozone. Whilst inflation is to be tackled because it makes the cost of living higher for citizens and businesses alike, using interest rates as a tool to control it pushes up the cost of borrowing to business and may stifle expansion and economic growth.
In the UK, it has been calculated that savers with bank deposits have “lost” £43 billion since the rate fell to 0.5%. On the other hand, borrowers with mortgages in the UK have “saved” £51 billion because the costs of borrowing have fallen.
As recently as October 2008, the Bank of England interest rate was at 4.5% - this was less than half of the rates seen in the mid 1970s when inflation was a major problem in the UK economy.