Judging by every statement he’s made since he took over as Governor of the Bank of England, Mark Carney will never raise interest rates during his five-year tenure.
Why doesn’t he want to? Well, look at how heavily leveraged people are in their personal borrowing. There are new university graduates with £40,000 or more in debt and young people who can’t get onto the housing ladder unless they borrow up to their ears. Then you have other groups of people who went on a borrowing binge – we paused for a couple of years after 2008 and then we started borrowing money again, and the low-interest policy has only encouraged that. That’s rife throughout the system, so if you raise interest rates even slightly then people’s disposable income can disappear overnight, precipitating the next downward movement in the economy.
That’s what Carney is scared of but it’s effectively painting ourselves into a corner: the longer the low-interest rate policy goes on, the more people become dependent on interest rates staying low. It’s a kind of illusion that everything’s all right, but it’s dependent on the assumption that the interest rates stay here for the foreseeable future, if not forever.
When they have low job security, people like to have a financial buffer in the bank. But that’s no longer possible.
Carney has actually cut rates, for what reason nobody knows. If your business model is so delicate that it’s dependent on interest rates going from half a per cent to a quarter of a per cent, then you probably shouldn’t be in business. What it means is that we’re seeing the disappearance of the high-interest account. The banks have so much money inside them they simply don’t want ours. If you leave it with them, the real value of your money is going down by 2 per cent a year.
In a roundabout way, what the Bank of England and the banking system are telling us is, “Go and spend it – you’ll get something for it.” That’s good for the economy, but when they have low job security people usually like to have a buffer in the bank, and that’s no longer possible.
Stewart Cowley is the author of Man Vs. Money: Understanding The Curious Economics That Power Our World.