Interest rates could return to pre-recession levels of 5%, says BOE deputy governor Charlie Bean
A period of ten years or more has been identified as a plausible length of time for interest rates to return to pre-recession levels of 5%. Sir Charlie Bean, deputy governor for monetary policy, has endorsed this stance, labelling ten years a ëreasonableí period of time for consumers to make the adjustment to higher borrowing costs.
Interest rates were cut to a record low of 0.5% in 2009 by BoE governor, Mark Carney, in order to combat the escalating financial crisis of 2007. Nevertheless, Mr. Carney has recently said that rates could rise by 2% from 0.5%, forecasting that they could reach a ìnew normalî of 2.5% by 2017.
This ënew normalí concept outlines a new financial paradigm which Mr Carney believes is better suited financially to the society of today. He acknowledged that the UKís level of household debt has grown exponentially for years now to the point where this long-term reality has altered the financial system completely.
Thus, Carney argued that that increasing interest rates too hastily would only worsen the amount of household spending and escalate the financial problems of consumers and pledged to implement all future interest rate rises in ëgradual and limited fashioní.
Mr. Carneyís viewpoint was mirrored by Beanís who, despite stepping down from his Bank of England role today, remains committed to the institutionís convictions.
When confronted about the potential for interest rates to return to 5% within ten years, Bean answered:
ìThat may well be so. I wouldn't want to say it will be back there in 10 years," he said.
"It might be reasonable to think that in that very long term you would go back to 5% but it's probably quite a long way down the road.î
Earlier this month, in a keynote speech, Mr Carney suggested that interest rates could rise later this year. This took markets by surprise and led to financial institutions revising their plans and plotting new routes to embark on. Markets had expected the rise to come in the first half of next year and the subsequent outcry in the wake of the speech condemned Carney for not taking the necessary action, with a member of the Treasury Select Committee comparing him with an ëunreliable boyfriendí.
However, the governor remained placid in the face of such heated admonition, going on to state that the timing of the rise is less significant than the speed at which future rises are made. This reinforced the governorís inclination to engage in decision-making in a prudent, calculated fashion whilst showing guardedness and a commitment to not rushing in.
The Bank has stressed on multiple occasions that it is fully committed to giving businesses and homeowners a keener understanding of the direction in which interest rates are going to aid them in future planning. This is in line with one of Carneyís flagship policies- that of ëforward guidanceí -implemented when Carney joined the bank in 2013.
Point of Interest
The Bank for International Settlements (BIS) has forebodingly speculated that excessively low interest rates have lulled governments and markets into ëa false sense of securityí. The organisation- informally recognized as the core of the ECB- urged legislators to start normalising rates.
"The risk of normalising too late and too gradually should not be underestimated," the BIS said.
However, this anxiety has not been reflected in market performance since the turn of the year: The all-world FTSE share index is up 5% so far this year. Additionally, the VIX, which assesses the implied volatility of the US market, is at a seven year low implying a comfortable level of stability.
Low interest have catalysed demand for higher risk stock market investments and fuelled larger participation in property and corporate bond markets.
"Overall, it is hard to avoid the sense of a puzzling disconnect between the markets' buoyancy and underlying economic developments globally," the BIS said in its annual report.
However, despite this global growth, the BIS said financial markets are still far behind its pre-crisis levels.
"Growth has disappointed even as financial markets have roared: The transmission chain seems to be badly impaired," the BIS said.
Merely an advisory body, albeit containing the views of many of the elite financial minds, the BIS do not set policy.
Rather it serves as a medium for central bankers to discuss ideas in the hope of reaching a meaningful consensus.
At present, the general viewpoint appears to be that policy makers ought to take advantage of the current economic growth within the global community, in order to reduce the emphasis on monetary stimulus.