According to reports such as - http://www.telegraph.co.uk/finance/economics/9895068/Bank-of-England-mulls-negative-interest-rates.html the Bank of England is considering a negative base rate to force High Street Banks to lend money to businesses.
Could this work and really help businesses to grow ? Is it the solution to the recession, or just a daft idea.
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Tracked mortgage
So, i have a tracked mortgage (tracked to the BOE base rate plus 0.6% I believe). If the rate is -1%, do they pay me?! OK, I know the answer...
With UK Base Rate at 0.50%
With UK Base Rate at 0.50% since 05/03/09 and UK inflation rate at 2.25 - 5.25% over the same period, we have had high negative real interest rates of -2% to -4.5% for nearly 4 years already!
Length of recession/depression ...
One school of thought, maintains that the recession has been so prolonged because it has not been the short very sharp shock that it should have been. This inevitably means that the pain has been dragged out over far longer and wider than it should have been
The point is, that because of the State’s intervention in attempting to give a soft landing all round, everything has been mutualised, so that the entire population gets hurt rather than certain areas just going bust and starting again
Recessions are rather like forest fires, in so far as one needs them to clear out the dead wood and encourage re-generation. Unfortunately, once one starts interfering with this process the long term damage is considerable; any recovery becomes very protracted and never very satisfactory. Furthermore, it permits hoards of zombie business to continue trading when, in reality, they should have gone bust
One can see this State intervention in action with EU counties not being allowed to fail, UK banks being bailed out, negative equity householders being underwritten with artificially fixed low interest rates …. and so on …. the list is endless
All this really does is try to avoid the underlying issues and bail out large swathes of the population at the expense of everyone else
So in answer to your question – no it is not a good idea and anyway where does the BOE think the money is coming from to cover the bank’s negative interest payments to them. Possibly higher customer charges all round etc. to cover the BOE’s bright idea. It has not worked for Japan etc. and now countries are into currency wars (who can drop their currency the most) to try another approach
So far we have had umpteen ideas all about reducing interest rates, QE, icrease inflation etc. – none of which have worked.
Perhaps they should apply a counter intuitive approach and start raising interest rates. Yes the fallout would be considerable, but it would have a great many benefits for the rest of us, although, not for zombie households, businesses or countries!
Harsh but realistic
Higher interest rates
Perhaps they should apply a counter intuitive approach and start raising interest rates. Yes the fallout would be considerable, but it would have a great many benefits for the rest of us, although, not for zombie households, businesses or countries!
I made the same point in my first post on A-WEB.
Bonds might plunge; equities might soar; and the pound would have a spasm. Fun all around.
In all seriousness though, despite it being a 'chicken and egg' argument, I don't believe that we will come out of this without a rise in interest rates IMHO. The fact that lenders are keeping their purses closed (or not open enough) has effectively the same outcome as higher interest rates, so perhaps the 'natural order of things' is alive and well, and things will begin to brighten up in time for the next election :).