By: Mike Campbell
The statement was made by UK Prime Minister Harold MacMillan in 1957 about the state of Britain’s post war economy. But you could well hear it from central bankers almost anywhere in the developed world these days, if they were talking about the cost of borrowing money. Yesterday, the Bank of England announced that it would hold the interest rate at the record low level of 0.5% for a sixth month. The European Central Bank rate has been at 1% since May 2009; the US rate is just 0.25% and has remained unchanged since December 2008; the Bank of Japan has ended its 0% rate and is currently offering 0.1% (again, since December 2008). The only major economy to buck the trend is Australia where the rate has been at 3% since April. What this means is that there is not much incentive to have money on deposit at the bank from a perspective of return. It is hoped that this will stimulate investment elsewhere; stocks and bonds market or simply encourage the spending which will get the economy moving.
It should also mean that cheap money is available from the banks for business and personal loans and that mortgages are more affordable. Of course, it was cheap money that got us into this mess in the first place. Concerns have been raised that even borrowers who were considered to be “good risks” during the sub-prime bonanza may default on their loans as a result of the rising tide of unemployment in the USA. That could trigger another round of misery. Central banks are likely to raise rates as soon as they think they can do so without choking off the putative recovery that we all hope is underway.