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Coffee House

Interest rates are poised to rise – which means we’ll find out how much of the recovery is real

13 June 2014

4:10 PM

13 June 2014

4:10 PM

Mark Carney’s hefty hint that interest rates could rise sooner than markets anticipate is politically awkward but important, as until they do so, we shall have very little idea of how much of the recovery is based simply on cheap debt and how much of it is real. The car industry and house sales, for instance, benefit from ultra-low interest rates, and while they appear to be booming, it’s not clear how much of that boom is pushed by the bellows of cheap debt.

What’s more, the current situation punishes those who are doing exactly what the government wants them to do. When he announced the ‘savings revolution’ in this year’s Budget, George Osborne strangely neglected to mention that even though you can now drop £15,000 into an ISA in one year, you’re still better off paying off a mortgage than saving up a nest egg because of the poor returns that savings accounts offer in an era of low interest rates.

[Alt-Text]


As for the measures on housebuilding that George Osborne announced last night at the same dinner: they’re helpful in speeding up brownfield development, and politically they show that the Chancellor is heeding the main warning that he faces on the economy at the moment, which is that the housing market is overheating. But their flaw is that they are rather last minute and by focusing on brownfield development, the Chancellor is continuing to sidestep the big truth that all politicians will need to confront if they really want to build enough homes: brownfield alone will not answer demand. But as I’ve said before, this shows how much of the political consensus that the Chancellor needs will have to come from his own side: these measures are all he can get past Eric Pickles.

Osborne has told BBC News this afternoon that a rise in interest rates would show ‘we’re moving out of a period of economic crisis, that the British economy is growing, that jobs are being created and homes are being built’. He’ll be hoping it doesn’t expose anything less encouraging just before a general election.

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