Denseman on the Rattis

Formerly known as the Widmann Blog


Low interest rates are part of the problem

The Empire of Debt by Dee Hon
Originally uploaded by Renegade98

More and more people seem to be coming round to my view that low interest rates are part of the problem, not part of the solution.

For instance, today this was published in The Times:

Ben Thompson, mortgages director at Legal & General, said that the cut in rates could backfire by denying banks the flow of new deposits needed to fund fresh lending.

“What lenders need more than ever are savers’ deposits – and they are not going to get them if they can offer only paltry rates of interest,” he said.

Also, John Redwood (the Tory MP) wrote this two days ago:

[…] the problem is no longer the price of credit the Bank of England is recommending, but the availability of credit. Business groups and others lining up to urge a new cut, should ask themselves is it the base rate that still causes them anguish, or the scarcity of credit, or the failure of the banks to charge them a similar rate to base rate? On reflection many business people might see it is the latter two issues that cause them most current concern.


If the MPC does cut rates more, this does not mean that suddenly all lending rates will fall by the same amount as the MPC cut. It will mean the banks have to create a different structure of lending and deposit rates so they can still do some business and make some money.
Far from establishing the MPC’s wisdom and authority, a further cut would be evidence that it has lost the plot. It would mean a world where base rate was less important than the market rates banks have to set.

I wish the Bank of England hadn’t been so quick to lower the rates – I fear it’ll be much harder to raise them than it was to lower them, even if that’s what the economy needs.

Leave a Reply

Your email address will not be published. Required fields are marked *