BoE confirms that they are trapped by low interest rates

The Bank of England’s 25bps cut to the benchmark interest rate last Thursday was fully in line with expectations – since Brexit it has been inevitable, not least given Governor Mark Carney’s doomsday rhetoric before and immediately after the vote. The BoE also unleashed a new round of QE, by promising to buy a further £10bn of corporate bonds and £60bn of government debt as well as establishing a £100bn Term Funding Scheme, designed to provide cheap funding to high street banks. For Mark Carney and the BoE it is a win-win: if the economy goes downhill, they can stand vindicated that this “preemptive” move was appropriate; if not, they can claim they managed to save the day by timely intervention.

After the cut – which took rates to the lowest ever in the BoE’s 322 year history – media attention has once again turned to how lower interest rates might affect the economy. One effect, which is only going to be compounded by the move, is that it becomes ever more attractive to hold cash rather than put money in the bank. Britons already hold almost £6bn more cash that they did a year ago – and the watershed moment will be when your current account comes with a monthly fee. We await the escalation in the war on cash.

But in the grand scheme of things the move in itself is a non-event. 25bps makes only marginal difference to businesses’ investment decisions, mortgages were already super cheap, and so on. What the BoE performed on Friday was the formal act of confirming what everyone already knew: that rates are not going up again for a very, very long time. It is the same with the ludicrous debate in the US, where many are seriously claiming that they can withstand increases in interest rates: “look at the US economy,” they say, “rates went up last December and it is going well” (it actually isn’t, but many continue to believe the propaganda). It is madness. What actually happened was that when rates were taken up by 25bps the stock market crashed, and it only recovered when markets were convinced that the 25bps was a one-off event and not the start of a tightening cycle. In the end, what the increase in rates actually served to ensure markets was that rates are going to stay low, as the chaos it unleashed confirmed that the Fed is indeed trapped. They can’t raise rates, as it will crash the economy: bubbles are everywhere – in government bonds, stock markets, housing, car loans, and so on – and they will pop if rates are normalised.

So we have no reason to change our opinion, and it goes for the UK as well as the US: rates are more likely to be cut than increased, and further QE is just around the corner.

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