The UK has now gone into recession, with the national income having shrunk for 2 successive quarters. Classical economics has always suggested that an important part of fostering growth in such circumstances is for interest rates to be reduced.
Our Bank of England have again told us that their policy rate of interest is being held at 0.5%. That is lower than the policy rate that the European Central Bank has set for the countries of the Eurozone.
Thus it might surprise readers to see that the actual rates on loans here in the UK are higher than those in most of Europe. Here in red are the average rates for loans for house purchase in a number of topical European countries, set beside ours.
A time traveller who stumbled into 2012 from twenty years ago, and who ended up trying to come to grips with our financial problems before he had updated himself on our politics, might wonder if an extremist Green cabal had seized control of our monetary policy. One could suspect that they deliberately want to undermine consumption and punish the ‘strivers’ and people with aspiration. But no, this is just Sir Mervyn King and the Bank of England!
This chart has not changed much since we did a similar comparison of the same interest rates in December.
In that report we suggested that even then the time had come not just to change interest rates, but to reform the way the Bank of England gives guidance to the banks about what sort of rates should be suitable. That December Report can be found here. And a more up to date comparison can be found here.
And on top of this recession, high interest charges and the highest inflation rate among the leading countries that, with the UK, founded the old G7.
Mervyn King is now in his last year as Governor of the Bank of England. With the selection process to choose a successor about to begin, so too must a debate on how the Bank can reform the way it works; and even how it can be made more accountable to the society it has served so very poorly.