Coffee House Specdata

Britain is booming. So do we still need ultra-low interest rates?

7 January 2014

9:10 AM

7 January 2014

9:10 AM

Car sales are up 11pc, making the FT splash BdU9Ez7CAAA29a0this morning. House prices are soaring again, up 8pc last year. And the British Chamber of Commerce has this morning released its Q4 survey showing a startling surge in investment, orders and employment (graph, above). Good news for George Osborne’s plan for a ‘balanced’ recovery: manufacturers’ capacity use, confidence and employment difficulties are at the highest since the survey began in 1988. The upshot, as Citi says (pdf) is that the UK economy will likely grow far faster this year than Osborne’s cautious official expectation. He will most likely have another healthy upgrade to announce in his next budget. Citi expects growth of more than 3 per cent this year.

Mark Carney, the Bank of England governor, should be eyeing all this nervously: if the BCC survey is at the highest in its 25-year history, why are British interest rates at emergency life support levels? Isn’t he just pouring more vodka in the punch bowl? And might he be re-inflating the bubble that got us into all this mess in the first place?

[Alt-Text]


The car sales, for example, are driven by cheap financing. Nationwide said last week that the house prices are being buoyed by ‘ultra-low’ mortgage rates. And the Chancellor still wants the taxpayer to subsidise first-time buyers through his deeply controversial ‘help to buy’ scheme.

Britain does appear to be booming. And it’s becoming harder than ever to justify why base interest rates are at 0.5 per cent – as the Telegraph’s Jeremy Warner has said. Until they rise, it’s hard to look at the current recovery without worrying how much of it is real, and how much another debt-fuelled illusion.

Subscribe to The Spectator today for a quality of argument not found in any other publication. Get more Spectator for less – just £12 for 12 issues.


Show comments
  • PAUL WESTON

    Britain may or may not be booming, but this is of little consequence with regard to interest rate policy. The ONLY reason for ludicrously low (and manipulated) interest rates is to enable Westminster to continue borrowing billions. The deficit may be falling, but the debt is set to hit 1.5 trillion next year. An interest rate rise would be a disaster for the government, which is currently utilising 10% of the total annual tax revenue to service the national debt.

    The BOE does not act in the impaertial best interest of the country, it acts as a wholly impartial extension of the government. I am surprised Mr Nelson fails to mention this highly pertinent fact.

  • M C

    Britain is not booming you, it’s in recovery. How have you got something that was even read by 69 people? Let alone that I should be the 70th to comment, it blows my mind. Everyone is an economist, let me give you some help from someone who never even studied economics: Words have individual meanings and are not interchangeable e.g.growth, recovery, boom and bubble; so don’t just start saying things everywhere until you look them up and at least understand that: There is no bubble you need to worry about or will be affected by, we are not in boom but recovery, and are seeing some real growth which is good….and no, of course rates shouldn’t rise yet.

  • Smartmoney

    Interest rates have to go up to cover pensions and deflate the housing bubble.
    What the banks want is another 6-12 months so they can clean up before going bust

  • ohforheavensake

    – And here’s a better article by Edward Luce in the FT (behind a paywall, I’m afraid- but you can register for some free articles) on why Fraser, once again, is wrong.

    http://www.ft.com/cms/s/0/8dd8d63a-7169-11e3-adbd-00144feabdc0.html?siteedition=uk

  • allymax bruce

    Fraser, ‘Britain’, is NOT booming; ‘the City of London’ is booming; the rest of ‘Britian’ is in a mock Austerity; what Mark calls a robbery!
    By-the-way, everyone must watch Max Keiser’s show today; a must see!
    Max tells it like it is; ‘car sales are up’ because ‘house prices are up’, because banks are repossessing mortages at a staggering rate; stealing businesses even!
    What a Fagan’s urchin you are Fraser.

    • itdoesntaddup

      What is staggering is how low repossessions have been. Below the levels at the height of the boom – because the banks have been told not to throw people on the streets, however hopeless their case.

  • PT

    Interest rates cannot go up. At least not by much.

    A great deal of the current surge in house prices is accounted for by the ultra-low base rate being priced into expectations. This should be worth 20% of price growth from 2007 peak values.

    If you roll back to 2006, interest rates of 7% would have severely damaged house prices. Now, interest rates of just 2-3% would be enough to cause stress within the market.

    In short; House buyers and house prices now have a dependency on ultra-low interest rates – we’re essentially cornered. Pensions and productive investment will have to take a big hit, because the housing market will remain the foremost policy concern.

    • MirthaTidville

      `Because the housing market will remain the foremost policy concern`..why and who says????..As i said below when you take out a mortage, factor in higher interest rates..if you dont you are defying common sense

      • PT

        Since when has ‘common sense’ driven government policy? It doesn’t. The electoral cycle and naked self-interest does.

        • Fergus Pickering

          What is clothed self-interest? And yes, governments want to be elected. Heavy stuff!

      • Tom Tom

        Have you ever looked at the ratio of housing stock to GDP ? Have you ever read up on the Wealth Effect and transmission mechanisms ? Have you any grasp of Permanent Income Hypothesis ? Do you know how Consumption is funded ?

        • MirthaTidville

          bet you dont though

  • Daniel Maris

    “Britain” ,may be booming, but I don’t think it’s booming for non-super rich UK citizens. Let’s not forget there are over 4 million non-UK citizens in the country. Many of them are super-rich bankers and members of corrupt foreign elites who indeed have plenty of disposable income.

    For most UK citizens real wages have fallen about 20% in the last 6 years and are continuing to fall. They find their children cannot get a decent job or cannot afford to move out into their own home. Or they find themselves overwhelmed by the cost of looking after aged relatives.

  • Makroon

    It will be interesting to hear what the “unbalanced recovery!!” crowd (Warner, Jones ‘n Nelson of this parish), will grab at next, now that investment is rising.

    • Tom Tom

      Investment ? LOL. Britain has one of the most pitiful investment records in the OECD and it was only sustained in the past by nationalised industries

      • Makroon

        Have you even bothered to read the BCC report mentioned by Fraser ? Oh No, I forgot, you know it all already, don’t you ?

  • Chris McLaughlin

    “Britain” is not booming. Some sectors may be booming, as may some limited geographical areas around London. But putting that aside…

    Preventing overheating in the economy by use of monetary policy (i.e. interest rates) was invented as an alternative to preventing overheating by the more traditional method of fiscal policy (i.e. tax rises). Given the UK is running a massive deficit and has an enormous national debt, wouldn’t it be more prudent to use tax rises to slow down the economy (if that really is required)? That way the benefit accrues to the state and the ordinary mortgage holder isn’t excessively penalised.

    • Makroon

      Fraser is guilty of a little journalistic hyperbole, is all.
      Of course there is no “boom”. But there is a quite strong, and broad-based recovery which will gradually spread across the country.

  • Makroon

    Yes, it would be a good idea to edge interest rates up a quarter percent (say) in the Summer, whilst making it clear that further rises will come only after much more progress on all fronts.
    I can’t imagine why people are so excited by “increased car sales” (translated: a diversion of disposable income into ballooning imports from France and Germany).
    We need a quieter car market and increasing EXPORTS – to start chipping away at our trade deficit.

    • HookesLaw

      We produce a lot of cars and export a lot as well. Remember Brown’s ‘scrapage’? That was a good subsidy to South Korea.

      Its hard to believe but about 250,000 Range Rover Evoques have been built in just over two years. Most have gone to export – generating about £2 billion
      in annual export value.
      And the importance of the car industry and inward investment?

      The Indian owned JLR – at Halewood alone, workforce trebled to 4,500
      in less than 3 years
      £3bn in supplier contracts for UK
      businesses, for Range Rover Evoque, since 2011
      More than 2,300 Halewood employees
      through skills programmes.

      And people want to play ducks and drakes with that kind of inward investment??

      BTW
      In terms of ‘feel-good’ and inflation then lower oil prices is important.

  • Chris Hobson

    Booming, yes maybe for the spectator readers. To me it seems like more of the same housing equity withdrawal ultra low savings rate and house price appreciation.

  • Smithersjones2013

    Hey if the Coalition want to commit political suicide just before an election. Just start increasing interest rates. I cannot think of any way better than pissing off “hard working families”all across the country.

    • Alex

      Fraser may be aware (unlike, it seems, many Spectator commenters and most of the press) that there are people in this country who are net savers (those approaching or in retirement, for example). Those people suffer under low interest rates and will spend more with high interest rates. So, to some extent, it’s swings and roundabouts. There is also an issue with policies aimed at persuading people to be financially prudent, saving for a rainy day and saving for retirement. Ask people to do that when real interest rates are negative and they’ll just laugh at you.

      • Smithersjones2013

        I understand the arguments for them and sympathise but within 18 months of the general election in the current circumstances it just doesn’t fly for me.

        Those people you refer to will more often than not will have family members with young families (I do) who may be hit by the interest rate rises far more severely than any benefit the interest rates would provide to themselves.

        I also think when people reach that age that they are less easily swayed by financial gain if they are already comfortable (and if they have investments they can’t be that badly off)

        Not only that but interest rates rises tend to benefit the wealthier sections more than the poorer section (the more you can afford to invest the better the returns) so Labour and Libdems can peddle their anti-wealth propaganda off the back of it.

        I really don’t think there are many votes to be gained and a good number to be lost by raising interest rates before 2015. If it is advisable to raise interest rates I’d leave it until 2016 and I think that’s what will happen.

        • HookesLaw

          You are right – but I can imagine that interest rates will slowly edge up – maybe by the autumn. Politically this can be painted as a sign of success – a return to ‘normalcy’ – and it is probably better again politically to get the public used to the direction of interest rates sometime before the election.

          • Smithersjones2013

            It’s the Tories funeral.

            • HookesLaw

              i can see where you are coming from. On the other hand people might fear inflation more.

          • Tom Tom

            I imagine no change unless the Fed allows it. Britain has had a policy since 1921 that British rates are always 50bp adrift of the Fed no more and Britain is simply not going to have Sterling harden to Chinese advantage in a world of competitive devaluation. I really wonder about people sounding off on this thread

            • HookesLaw

              You never would of course. Where in the Bank of England Monetery Policy Committee remit is it written that it keeps rates 50 basis points adrift of the Feds?

      • HookesLaw

        You are perfectly correct but a recession is always accompanied by low interest rates. Its hard on savers but by definition savers have capital and the economic cycle is what it is.
        If it is needlessly boosted such that there is inflation then that hardly helps people on fixed incomes.

        • Alex

          I’m aware of the reasons for low interest rates during a recession, thanks. It doesn’t mean low rates in perpetuity.
          You are aware that the last technical recession ended in Q3 2009?

          • HookesLaw

            Yes – and I acknowledged the point of your remark.. And clearly interest rates will move up and the BoE have given guidance about when that is likely to be. The nature of the cycle will dictate when that will be. At the moment though there seems no inflationary push to indicate anything immediate.
            Thankfully there is relatively little wage pressure inflation – despite the large increase in employment. This restraoint has been good for the economy – despite the way Balls etc twist it to make it seem bad. If inflation falls and the rise in tax allowances kick in then the ‘cost of living’ argument will be well and truly holed below the waterline.

            The reality, which Mr Nelson ignores, is that this restraint is important to the recovery and in keeping inflation and interest rates low.

          • Tom Tom

            Technical recession is a statistical joke. You clearly have no idea how many businesses will fold this month and how the British economy ran 1931-1952 on 3% Bank Rate

            • Alex

              Yeah, I have a different opinion from you so I must be completely ignorant. You’re so right.

      • the viceroy’s gin

        That’s the whole point of current policy though. Savers are being stripped of wealth, which is being transferred to others via a skewed interest rate.

        All of the debt overhang (governmental and private) and all of the insufficient bankster reserves are being inflated away by QE and low rates. Anybody who’s not one of those special classes gets screwed.

  • Alexsandr

    The government cant afford a hike interest rates before the GE. The fallouit from mortgage repossessions would be bad for them. And taking the hundreds of pounds from people pockets each month will kill any recovery.
    Why not look at the bank spreads. Deposits at near zero%, lending starting at 5%. That’s why peer to peer is taking funds from the banks where you can get 7%+ on your investments.

    • itdoesntaddup

      What happened ahead of the 1992 election, which John Major won?

      • Smithersjones2013

        This ain’t 1992 and Cameron hasn’t the luxury of 10 years of Margaret Thatcher securing the Tory base and in 1992 the UK wasn’t in the early stages of recovering from the worst financial crisis in 80 years.

        There is no comparison……

      • HJ777

        But in 1992, Major had the good fortune to be up against Neil Kinnock, who was clearly unelectable.

        In the next election, Cameron will be up against Ed Miliband …. oh, I see your point.

  • Tom Tom

    Fraser you are increasingly absurd. There will be no rises in interest rates before May 2015 because the Treasury does not want the deficit to explode. You live in London with its micro-climate and bubble world. In the Outer Zone the country is far from booming unless you are the Albrecht or Schwarz families opening Aldi and Lidl stores across the country.

    You know that City Bonuses alone add 0.5% to National average earnings figures which shows how skewed the stats are to London. Homes bought in London are predominantly Cash buyers which suggests funk money rather than mortgages.

    Raise interest rates and watch the move to regional autonomy spread from Scotland. You are economically out of date thinking interest rates have much effect during credit rationing because most of Britain is experiencing credit rationing even at 25% interest rates on retail debt. If car companies like VW or Toyota with their own banks are funding sales of metal that is because they are cash rich unlike Peugeot.

    It is hardly Mark Carney who exists to prop up bank balance sheets by inflating the value of assets collateralising debt. I really wonder about your economic understanding which seems to be confined to charts

    • HookesLaw

      Aldi and Lidle are good – they are keeping inflation low and helping employment. You are right about Mr Nelson going round in blinkers. And both Carney and Osborne have been saying the recovery is fragile.

      • ButcombeMan

        Agreed. I know nothing of Aldi but with “senior management” have occasionally visited LIDL.

        Some of the products and many of the prices are very good.

        28day aged, excellent beef for example last week, streets ahead of Tesco. Some of their own branded “De Luxe” range just astonishingly good..

        As a shopping experience, not much, just a shed. Combine LIDL with visits to Waitrose for the free coffee and the whole shopping issue is cracked.

        Tesco and the others, have a problem, but especially Tesco. What are Tesco for? They lost their way under Sir Terry. Whenever I see a food shop start fiddling about with cheap TVs I sell their shares.

        • Makroon

          Oh, rubbish.
          The best beef bargain of Christmas was Tesco’s excellent quality prime rib (on the bone) at £9 or £10 /kilo (Fore-rib, or aft). Lidl had nothing remotely of the same price/quality.
          Lidl did have frozen NZ venison “bits” at the extortionate price of £18-20/kg !!
          Aldi is just the latest middle-class fad – a junk food barn basically, with rank vegetables, undrinkable “wine”, tasteless chocolate (hint – Lidl best for good quality chocky), and very low quality pastries/biscuits and “ready meals” yuk.
          Tesco is indeed on a downward path – nothing to do with Sir Tel, everything to do with the lame-brained, Labour voting, clueless Clarke, who interprets “listening to the customer” as listening to the Hampstead Labour luvvies and their visceral hatred of Tesco.
          There is only one rule – shop around !

    • ButcombeMan

      Tom Tom
      Exactly right.

      When Fraser writes this sort of stuff I just wonder how he ever got into his job. An A level economics student should know better.

      There are swarms of households over borrowed as result of the Big Brown Mess. This will take many years to unwind. There are loads of small businesses living on the edge also, not really viable and certainly not viable if borrowing costs increase. They go under and property companies and pension funds (and banks) take another hit.

      If anything, Osborne still underplays how fragile things are. Labour of course are in denial.

      Yes, those of us with investments and no borrowing are doing very well. It was always thus. Unto them that hath shall be given. QE is doing that. Let us remember who started it.

    • Andy

      There will be a modest rise in interest rates this year.

      • the viceroy’s gin

        Don’t bet on it.

    • the viceroy’s gin

      You’re decrying “regional autonomy” like it’s a bad thing. It’s not. Just because the jocks are too stupid to take advantage of it, doesn’t mean everybody else is. If higher interest rates force regional autonomy to increase, bring on the higher interest.

      The deficit doesn’t have to explode. Spending can be cut.

    • the viceroy’s gin

      And one more thing. The situation you appear to be engendering is one whereby the banksters scarf up free cash, conditional only on their buying up Boy George’s debt pile, thereby slamming additional debt down onto generations yet unborn. With the rest of their free money, the banksters get to frolic off to the commodities casino, to drive up everybody’s cost of living and depress real income.

      No decision made comes without cost. It’s a matter of who’s paying that cost. Should it be generations unborn, the savings dependent and every day consumers and workers?

  • HookesLaw

    Hang on – according to Balls and Miliband there is a cost of living crisis. Car sales cannot be soaring.
    Car sales have been strong for more than a year. They were strong all through the alleged triple dip recession.

    • Tom Tom

      Go to Harrogate and look at row upon row of new cars, usually Range Rovers outside empty shops, then go to Keighley and see old cars with balding tyres and poorly maintained. One place has the leased automobile and the other the owned car

      • HookesLaw

        The plain fact is there are loads of fiestas and focuses bought for every range rover. All these new cars are good news for the second hand car buyer.
        But you are right about the recovery not being so dangerously strong or overheated in ‘the provinces’.
        We have been very fortunate with inward investment in respect of car manufacturing. Range Rovers and Nissans and Minis and Hondas and Toytas are all heavily exported. It beggers belief that people are willing to play ducks and drakes with this investment – investment which is badly needed if we are to rebalance our economy.

        Can you imagine how much France would welcome investment like this – at a time when as you point out their own PSA is nearly bankrupt. Renault not much better.

        • Makroon

          France would hate it and block it.
          Their “industrial strategy” as in most other sectors, is to protect their favoured national champions (PSA and Renault).
          Welcome to the 1960s !

          • HookesLaw

            PSA are on the verge of bankruptcy. They are closing factories and shedding jobs. Renault are slashing jobs as well. Socialism and trade unions in France have delayed the adjustments we went through years ago but cannot hold back the tide much longer.

            France cannot stop us being the home of inward investment. I imagine if we left the EU they would do all they could to poach our car manufacturing jobs but the govts of Poland Bulgaria and Romania might have a say in that. And India.

      • Andy

        In Harrogate you have a very weathy town. It has its poor bits too. Also it has a huge drug problem as it is a ‘hub’ – easy access to the A1. Keighley is by conparison a poor town, although there is quite a lot of money around in the surrounding area. Plenty of drugs money too !

    • Smithersjones2013

      And the other way that the Tories can commit political suicide is for their idiot sycophantic doormats to keep telling people how well off they are when they don’t feel well off and are still struggling. This ain’t 1959. We’ve actually “had it” a lot better!

      Keep it up Hooky . You’re a one man Tory Party wrecking crew!

      • Makroon

        Hookes’ main audience seems to be choleric UKIPpers, busy trying to out-doom Labour on the economy, so I doubt he does much damage to the Tories.

        • the viceroy’s gin

          Actually, the Camerloons themselves appear to disagree with you, as they’ve done the sensible thing and quit spewing all their previous bile, as they know statistically it’s killing them.

          Looking at that Ashcroft poll, it’s probably too late for them, though.

          • Makroon

            BBC radio 5 live thinks that by continuously poking the immigration issue (they were at it yet again today), they will damage the Tories by giving UKIP airtime (Farage interview).
            However, their “demographic” is heavily working-class, public sector and benefit receivers. They have probably succeeded in peeling off quite a few Labour votes to UKIP.

            • the viceroy’s gin

              By virtue of being a populist movement, UKIP is going to gain supporters no matter what people do. If 5 covers UKIP, it gives them exposure and will attract some people. If 5 doesn’t cover UKIP, it gives them a grievance point, and they’ll end up with exposure anyway, and attract some (perhaps slightly different) people. So, in the near term, the only way to defang UKIP is to address their issues.

              In the longer term, as their issues are addressed to the electorate’s satisfaction, across the political spectrum, they’ll obviously meld and morph into a more establishment friendly form, and their populism will fade. But they’re still in a growth phase, as nobody’s addressing their issues.

  • Colin

    If you’re already wealthy, then, you’re correct, Britain’s booming.

    Unlike the banks, who’ve been busily rebuilding their balance sheets, with the help of the ordinary tax payer; the ordinary tax payer isn’t quite there yet. So, the idea that we should now raise interest rates, is nuts. I’m not condoning the behaviour of individuals who borrowed beyond their means, but to kick ordinary people in the teeth, just as they’re starting to get back up is mean and, self defeating.

    As for “Ultra low” interest rates: it’s all relative. The average mortgage rate, available to ordinary borrowers is around seven times the base rate.

    • HookesLaw

      You are right about mortgage rates of course. There seems to be a disconnect between them and base rates.
      And you are right about banks, but they have been ordered, internationally, to rebuild their balance sheets This rather makes a nonesense of Mr Nelsons urgings about interest rates. Is there any mention of inflation in Mr Nelsons musings? No. With no inflation (last months figures were down) where is the justification for rising rates? And are car sales being driven any more than normal by cheap loanns? Car prices are being discounted and there is a mass of competing brands.

      But again of course the governor of the bank of england and his committee who have power over rates, not Osborne, has ALREADY said that other things beside inflation will be considered. ie unemployment. So Mr Nelson is pushing at an open door.
      But mainly in order to justify his scare stories Mr Nelson and his buddy, the laughabke Mr Warner, must explain where are all the junk loans which have been bundled into special vehicles and where are all the mortgage companies borrowling short and lending long. Where is the US slump which turned these special vehicles into junk. Where are all the banks busy lying to each other. Where? Where are the circumstances now which match the circumstances then?

      • Makroon

        You are correct on one thing – the erratic and depressed Warner should seek psychiatric help.

        • HookesLaw

          You are very kind, but I would like to think I am correct on many things (!) – certainly more so than poor johnny one note Mr Nelson.

    • dalai guevara

      Interest rates are a permanent state of disconnect with the real world and have been for years.
      The base rate might reflect what goes on in savings, it does not however with regards to borrowing – whether it’s mortgages, business loans, credit cards, and then of course the payday market. A two-tier system for mugs and muggers is in full operation, we can only pity those who rely on the latter forms of lending.

    • itdoesntaddup

      The problem is the banks have been busy adding to reserves through interest rate margins, while ignoring the need to write down over-extended mortgages. Indeed, if they had spent the time since 2007 using their interest rate margin to speed up mortgage repayments instead we would now have much healthier bank balance sheets, and much reduced risk of repossessions and negative equity.

      Now we’re off to the races – Nationwide house prices are increasing at around 13% p.a. on an annualised basis in the months since Help to Buy was extended in coverage. Manchester is the new hotspot thanks to the BBC, even eclipsing oligarch land in London. Perhaps the BBC should have been moved to Newcastle instead.

    • MirthaTidville

      no its not nuts far from it in fact..It is causing this mini boom,and many savers are sick of subsidising someones cheap mortgage…and they are very cheap.The lack of interest rates has pushed many elderly savers into the benefits trap, which they will never escape from, and has to be paid by taxation . When you take out a mortage you must budget for interest rates to go up, if you dont you shouldnt buy. Sorry the borrowers have had it too good for the country`s good and the balance needs to be restored

  • Andy

    The answer is NO. All Central Banks are playing a very dangerous game keeping base rates artificially low.

    • Tom Tom

      It is a more dangerous game now to raise them……..whole asset classes would implode driving banks into a Super Meltdown far bigger than 2008

      • Andy

        No it is not. The danger is allow them to remain low for much longer. We already have, as you point out, an number of asset price bubbles, so if rates were very gently and slowly raised this might start to gradually deflate these bubbles. But of one thing we can be sure: the longer rates remain at near zero (they are actually negative if you take into account inflation) the larger all these bubbles will become. This is part of the mistake on the naughties.

        • the viceroy’s gin

          I’d be happy to leave rates low, if governments weren’t taking advantage of them as they are, to bury nations in debt. But apparently, the only thing that will take these socialist nutters out of their debt spiral is a rate rise.

      • the viceroy’s gin

        Let them melt down. If that bad paper has to be flushed, then let’s get to flushing.

        It doesn’t have to happen in 6 months, but some incremental moves can be initiated now, and continue regularly over the next 2-3 years.

Close
Can't find your Web ID? Click here