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  • Writer's pictureWilliam Webster

Policy Bias

When will interest rates rise?

That’s a big question that faces markets and has the potential to upset asset prices. Past experience suggests when the economy gets hot rates rise. Leading or lagging depends on the balance between short term growth and longer term inflation. Previously this has been a political decision and the inflationary consequences in the UK economy are well known.

Has this changed?

At the time of writing base rate remains at 0.5%. This 300 year low has dragged down all rates along the curve. Consumption and asset price inflation boost the economy. But have things been so bad that a “temporary” 0.5% needs to last years?

Perhaps the answer is in who owns the leverage.

Whilst the banks and to a lesser extent consumers have adjusted their balance sheets the government deficit has ballooned, likewise that of the Bank of England’s balance sheet.

For any borrower low servicing costs are a good thing ditto bond investors. Therein lies a problem.

There are vested and very influential interests that benefit from continued low rates. They are the Treasury, the Bank of England and a Government running into an election period.

This conflict of interest can only be over ridden by a truly independent rate setting process. About which there are serious doubts.

The pressure of “group think” must be overwhelming so the policy bias is towards keeping rates lower for longer than is appropriate.

Markets will dictate how long this can last.

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