During their heated exchange about managing the economy in their televised debate on Monday 25 July, former chancellor Rishi Sunak looked at his rival for prime minister, Liz Truss, and demanded to know if she knew what interest rates were mortgage loans. the United States.
“Come on, what’s that,” he squealed while Thras remained stone-faced. If she admitted that rates had nearly doubled in the past six months, which, as they have, she clearly felt it would be fatal to her financial plans. The economy could not be entrusted to someone so reckless.
But be patient. Is this true? We have been living in a world of almost zero interest rates for 14 years. We are so used to them that we hardly talk about them anymore. And yet, they now appear to be finally coming to an end as central banks around the world begin to grapple with rising inflation.
In the US, the Federal Reserve raised interest rates this week by 0.75 percentage points, its fourth straight hike, and its key lending rate is now at 2.5%.
The Bank of England has been steadily raising interest rates and will no doubt do so again in August. Even the European Central Bank (ECB) finally, albeit belatedly, joined the party, raising 0.5 percentage points, the first rise in a decade of effectively negative interest rates. Perhaps, as Sunak clearly believes, this will be a disaster for the global economy, plunging households and companies into bankruptcy, and we must do everything possible to keep the cheap money flowing forever.
And yet, it’s also possible that zero rates were always an illusion, and one that ended up doing more harm than good. Ultra-cheap money created a bitter generation gap as rising house prices made it impossible for younger people to get on the property ladder. spawned legions of zombie companies barely surviving on easy credit. it encouraged reckless spending by governments who thought the bills would never come due. it created a debt boom and fueled asset price bubbles. and destroyed the incentive to save.
It’s true that free money could have helped save the economy in the wake of the financial crisis of 2008 and 2009. But one day interest rates will have to return to normal – and now is the time.
“By any historical measure, interest rates have been extremely low for the last 14 years,” says Nicholas Crafts, emeritus professor at Warwick University and an expert on British economic history. “Even in the [worldwide depression of the] The 1930s did not drop below 2pc, and even that was only for a few years. And yet, during that time, growth and productivity and investment have also been very weak.”
The era of the zero factor has lasted much longer than anyone first thought. Flash back to 2008, with banks around the world collapsing and the financial system in turmoil, central banks around the world cut interest rates to 300-year lows. From 5% before the crisis, by March 2009 the Bank of England had cut interest rates to 0.5%, the lowest level since it was founded in 1694, in an attempt to stimulate the economy.
