A Lack of Interest: The Politics of Interest Rates

(Photo: The Express)

By Conrad Whitcroft – Contributor 

Since Labour made the Bank of England independent, there has been little said about the wider social impact of the decisions that the Bank can make. Within the chamber of the House of Commons, or the opinion articles of the broadsheets it is fiscal policy that is debated. Meanwhile, the economy’s lesser known twin, monetary policy, is left to the experts, providing they keep inflation low, which they nearly always do.

Indeed, the very phrase “interest rates” is the hallmark of boredom, often satirised to the point that they had to be defended by Peep Show character Mark Corrigan in his infamous rant against some ‘ambivalent hippies’.

But the regular meetings of the (equally comatosely named) Monetary Policy Committee, who set interest rates, are making an inherently political decision. Like a Roman Emperor above a defeated gladiator they are deciding who will be spared and who will die. However, it would appear that this Emperor has spared the aged gladiators and put the young to the sword.

Since the financial crisis of 2008, interest rates have been at record lows in the UK in order to stimulate the economy, make government borrowing cheaper and lift the weight off ‘credit-happy consumers’ who found themselves with limited earning power amongst a pile of household debt.

Any economist will tell you that this is standard monetary policy in response to a recession, but this does not explain why there was not a normalisation of the Bank of England’s interest rate as things got better throughout the 2010s. In fact, interest rates got even lower in response to the 2016 Brexit vote, reaching a then-record low of 0.25% after eight years at 0.5%.

In the wake of COVID-19 (and my generation’s SECOND “once in a lifetime economic crash”) the Bank of England in tandem with other central banks, correctly lowered the interest rate to a new record low of 0.1%. This raises the most pressing economic problem that comes from failing to normalise interest rates – if the rate was low before the crises, how can you expect people to borrow and spend if their credit card is a fraction of a percent cheaper?

Alongside these economic questions, interest rates pose a problem for inter-generational politics. In the age of “ok boomer” older internet users have often berated millennials who complain about the economy by suggesting that they cut down on coffee or open a savings account.

Notwithstanding the former lattes, the prospect of opening a savings account was tantamount to a ‘get-rich-quick’ scheme for our parents’ generation, who were able to save at rates of 10%. Today, even the most tactical saver is lucky to get 1% due to the low-interest age we live in.

This is a problem because in order for young people to reach anywhere near the property-owning status of their parents, a key contributing factor to quality of life and economic health, then they must have substantial deposits to prove to a bank or building society that they are responsible enough to be sold a safe mortgage. However, an ISA rate of 0.01% (Nationwide) will not provide the boost that we need to get ourselves into this position, and successive rate cuts only dampen the economic prospects of tomorrow’s would-be homeowners, who are also tomorrow’s taxpayers.

As a young saver I look on in horror whilst my parents and co-workers get to reap the rewards of discount mortgages and cheap car loans; neither of which I have the requisite credit rating to acquire. Lower rates do not translate to my overdraft or student loans (calculated at RPI + 3%).

Additionally, lower savings rates result in less deposits, which means banks are wanting a higher return on what little capital is put into their safekeeping which incentivises them to lend to more credit-worthy (read “older”) customers. The lack of bank deposits may explain the recent wide scale introduction of 40% overdraft rates (a form of debt most commonly used by younger borrowers) despite record low savings rates.

Therefore, low interest rates squeeze young people at both these ends for the sake of satisfying older borrowers and large corporations with ever-cheaper credit costs. This has contributed to the build up of mountains of private sector debt, much of which had to be underwritten at the expense of the taxpayer, who are getting increasingly younger as Britain’s boomers retire with their gold-plated pensions and in-demand houses.

The answer to this problem is not simple because a raise in interest rates would be a fat lot of use if the higher borrowing costs sucked up cash and caused businesses to deleverage rather than invest in hiring new staff, a very real risk with inflation already perilously low.

A possible solution lies in the Help to Buy and Lifetime ISAs offered by the government that give a healthy 25% annual bonus payment for young people saving to buy a house or for retirement. However, can we really expect taxpayers to subsidise savers when this has traditionally come from (at least in theory) sound investments by our financial institutions. Will such subsidies even be practical in the aftermath of the COVID recession?
The answer to the question is not easy, but we cannot afford to ignore the politics of monetary policy and should stop considering the issue as out of our hands. If we keep up this low-rate binge we will see the inter-generational gap accelerate, household savings deteriorate, and an economy increasingly fuelled by central bank credit lines rather than productivity or growing wages.

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