Fresh installments of the “Harry Potter” and “Pirates of the Caribbean” films were big at the box office. Apple had just launched a new kind of device that browsed the web and made phone calls. A young Cristiano Ronaldo had led Manchester United to the Premiership title, and Amy Winehouse had the biggest album of the year, while “The Big Bang Theory” was about to start on television.
2007 seems like a log time ago now. But that, extraordinarily, was the last time the Bank of England raised interest rates. July 5 is the 10th anniversary of the last hike. Since then, it has only ever cut them.
True, the Bank of Japan has been on hold for even longer. But a whole decade without a singe rate rise is too long for a major central bank. It risks creating complacency among borrowers, it is destroying the savings culture, and it is distorting asset prices, most painfully in housing. It is time the Bank nudged rates upward, if only to show it still can.
When the Monetary Policy Committee met in July 2007, the global economy looked very different. Globalization was powering a spurt of growth. The banks were lending money like crazy. Real wages were rising, and company profits were powering ahead. The Bank was mainly worried about wages, prices and housing all running out of control, and it tweaked interest rates upward for the fifth time in less than 12 months.
But since then, it has not raised them a single time. It has cut, all the way down to 0.5% in the depths of the financial crisis of 2008 and 2009, and then by another quarter point in the aftermath of the vote to leave the European Union last year. But through 120 meetings of the MPC, or 240 days of earnest discussion about the state of the British economy, there has not been a single rise. Presumably someone at the Bank’s ornate Threadneedle Street headquarters still knows the drill for putting rates up — but they may have to search around for some refresher notes when the day finally comes.
Among the four major global central banks, of which admittedly the Bank of England, is the most junior member, it is rare to go that long without a single rate rise. OK, the Bank of Japan has been on hold for longer, but only just. The last time it raised rates was in February 2007, when it put them up to 0.5%. The European Central Bank raised rates twice in 2011, the last time six years ago this week. The Federal Reserve last raised rates only last month. Other slightly more minor central banks have been more active as well. The Bank of Canada raised rates seven years ago. So did the Reserve Bank of Australia. There is no issue that the U.K. is, Japan aside, alone in having gone so long without a single rate rise.
True, there are good reasons for that. The depth of the crisis in 2008 and 2009, which hit the U.K. as hard as any economy, certainly demanded an extreme response. It has taken Britain a long time to claw its way back from that. The decision to leave the EU has thrown the economy into turmoil, and it may well need a lot more stimulus to pull through the next few years. Even so, a decade is a heck of a long time. It crates risks of its own — in three big ways.
First, it creates complacency. A homeowner with a mortgage could easily be getting close to 40 without ever having seen a rate rise. A finance director could have been through two or three jobs without ever having to cope with more expensive borrowing.
Sure, there have been plenty of warnings about how rates will inevitable rise one day, and how people and firms have to be prepared for that. But that is not quite the same as seeing it in real life. At a certain point, people just forget that rates ever go up, and borrow as if it is not going to happen. When they do finally rise, it is going to come as a tremendous shock — and a lot of households and businesses won’t know how to cope.
Second, it destroys a savings culture. The U.K.’s saving ratio has already fallen to a record low for the last 40 years — and the British were never great savers in the first place. The Bank is now warning about people taking on too much debt. But what does it expect with rates this low, and with so little memory of them ever going up? There isn’t much point in saving when you earn so little on your cash. But over the medium term, an economy needs to save and invest to prosper.
Finally, it distorts the financial markets, hooking companies on cheap debt and driving up asset prices, not least, housing. The average house now costs £211,000, seven times the average salary, and that ratio has doubled in the last two decades. It is at all-time highs. Cheap money is fueling an asset-price boom, but the price of that is that many people can’t afford to buy a home — and that is not healthy either.
There are good arguments to be made for stability in monetary policy. But this is taking it too extreme levels. Despite the Brexit vote, and even though growth looks likely to be sluggish this year, the economy is in reasonably stable. Employment is at record levels, consumer spending is holding up, and house prices are stable. The economy is not exactly in great shape, but nor is experiencing any kind of “emergency.”
It is surely time to tweak rates back up to 0.5% — just to show the Bank still knows how to do it. And the next meeting, on Aug. 3, would be the perfect time to do that.