Mark Casci: A rise in interest rates would give us flexibility to mitigate economic shocks

For the last decade interest rates have not risen beyond 0.5 per cent, one of the lowest on record, with Monetary Policy Committee members at the Bank of England having not agreed upon a rise in the cost of borrowing in more than a decade.

The gargantuan cut in rates was brought about due to economic necessity a decade ago.

As the world’s economy tanked there was a clear and present danger to the supply chain of finance.

It was feared that banks, desperate to shore up their capital positions, would choke off access to funding for consumers and business. Fears of a lost decade abounded.

Faced with limited options for keeping the economy moving, the decision was taken to institute the record low cost of borrowing. And so it has stayed for 10 long years in which time savers have watched in despair as their cash piles accrued tiny amounts of interest.

In all likelihood this will all come to an end this Thursday.

The Bank of England’s governor Mark Carney, a man who chooses his words more carefully than most, has already let it be known that a hike in the cost of borrowing was likely in the not-too-distant future.

Last week’s better than expected growth figures, while still very weak, are likely enough now to be sufficiently strong to convince the MPC to push the rate up for the first time since Gordon Brown’s ill-fated premiership.

For many in the banking and financial sector it is a rise that cannot come soon enough. Many bankers, analysts and commentators (myself included for what it is worth) were not keen on the reduction to 0.25 per cent which was instituted last year following the Brexit vote.

Giles Hutson,chief executive of Insignis Cash Solutions, said: “The Bank of England should increase UK interest rates by 0.25 per cent as the current interest rate environment continues to fuel a consumer finance bubble, and penalise saving and investment long after the benefits have worked their way through the system.

“More broadly, rates need to rise to avoid the danger of families factoring a low interest rate climate into their long term financial planning, for example when deciding the level of mortgage payments they can afford.

“A hike in November would be the first increase in 10 years and act as a shot across the bow to remind people that low interest rates won’t last forever.”

Peter Thorne, a senior financial analyst at Charles Stanley, sounded a note of caution.

“Rock-bottom interest rates have been terrible for UK banks’ profitability, but any interest rate rise – which increases the amount they earn on interest free balances – could actually be a double-edged sword.

“Higher interest rates will boost UK banks’ net interest income but the equity market is increasingly concerned about the slowdown in the UK economy and the negative effects it could have on loan growth and bad debt charges which a rate rise might worsen.”

While there may be a compelling enough case for sticking with the status quo, a rise in borrowing is coming and if not this month then soon thereafter. While the latest GDP figures exceeded market expectation it did not do so by very much and the fact remains our economy is sluggish.

2018 will be the year in which Brexit negotiations hopefully start to take shape. The no deal narrative is smoke and mirrors, such a move would be catastrophic for our economy and the whole world’s at large.

There will be bumps in the road while this happens and having rates at 0.5 per cent or above gives the MPC some breathing room to make changes as it when required.

Why make a hard task harder?