What’s normal? Good question, says Bank of England

Relief, because they won’t fear being crippled by nasty increases to the kind of levels that have characterised interest rates since the dawn of the Age of Englightenment.

MPC member David Miles was in Yorkshire last week to meet business leaders and take part in a question-and-answer session at Leeds University Business School.

Afterwards I asked him about the potential timing of a rise in the base rate, a subject of perennial interest. Prof Miles said: “I don’t think we should be in any hurry on the MPC to raise interest rates in the very near term because it looks to me like there is a fair degree of slack in the economy and the inflation outlook is much more benign and inflation pressures subdued than they have been for the most of the last five years.

“I also suspect that when the time comes, the right strategy is to very gradually move interest rates back up to something that’s a bit more normal.”

Asked what he meant by normal, Prof Miles said: “That’s a good question. Five per cent was the average in the ten years between the MPC being formed in 1997 and the eve of the financial mess. If you take the 320-year period since the Bank of England was established in 1694, it turns out the average bank rate was also five per cent.”

The “new normal” is likely to be signficantly lower, he said. Normal seems to have gone out of fashion, which is good news for journalists, if no-one else.

ULTRA-LOW interest rates and quantitative easing have helped Western governments collectively benefit by $1.6 trillion through reduced debt-service costs and increased profits from central banks, according to McKinsey & Company.

The consultancy estimates that large borrowers such as governments have benefited by $710bn as interest rates on debt fell. Homeowners have also benefited as the lower cost of mortgage credit bolstered house prices, making us all feel richer.

Younger households that are net borrowers have benefited, but older households with significant interest-bearing assets have lost income. Western households lost an estimated $630bn in net interest income.

McKinsey claims that government interest payments on debt could rise by 20 per cent with a move in the cost of borrowing. That’s one good reason why the “new normal” is here to stay.

PROFESSOR Giuseppe Fontana of Leeds University Business School chaired the discussion with David Miles of the Bank of England in the Yorkshire Bank Lecture Theatre.

He sees little sign of the UK economy rebalancing away from unsustainable consumer spending and towards investment and exports.

“Mervyn King tried to do it when he was Governor by devaluing sterling by 20 per cent but it didn’t work,” he said.

The BoE and Treasury are hoping that business investment will ride to the rescue, he added.

Prof Fontana is concerned about high levels of household debt in the UK and youth unemployment, both here and in Europe.

He said: “We are in very unchartered waters still, whatever the Government and politicians might say. We are still living in very uncertain times. Just look at the private debt of the British consumer. That’s very dangerous. We can’t afford that.”

Household debt hit a record high of £1.43 trillion, including mortgages, at the end of last year.

Another good reason why interest rates won’t be going up any time soon.

I SPOKE with Baroness Jo Valentine, the chief executive of lobby group London First, on Friday about how the regions can contribute more to the UK economy.

She said cities need to know what they are and what their USP is. Baroness Valentine said there are about six cities that claim to be the number two financial services centre in the UK.

She added that cities need to be honest about what their special something is.

“We have a bit of this in London: ‘We are the tech city of the future’. Everybody is the tech city of the future.”