Inaction on extraordinary low interest rates carries its own risks
The Institute of Directors has raised concerns over the Bank of England’s decision to hold interest rates at 0.5% for another month.
James Sproule, Chief Economist at the IoD, said:
“Caution won out again at the Bank of England today, with the Monetary Policy Committee spooked by a worsening outlook for global growth. But, with strong consumer confidence and wages on the up, the arguments against raising interest rates from the current exceptionally low level are falling away. The IoD has been calling for over a year for the Bank to start the process of raising rates and the need to normalise remains.”
“Our concerns go beyond the need for normalisation, as there is genuine apprehension over asset prices, the misallocation of capital and consumer debt. Borrowing is comfortably below the unsustainable pre-crisis levels, but with debt once against rising there is a need for vigilance. The UK is all too familiar with consumer debt getting out of control. Without gradual rate rises to dampen debt-fuelled exuberance, borrowing poses a risk to future economic growth and stability.
“The current period of low inflation is no argument for keeping rates low, as it is being caused by the low cost of imported – and volatile – goods, like oil. Core inflation, by contrast remains in positive territory. The question is, will the Bank look back on this unprecedented period of extraordinary monetary policy and wish they had acted sooner? The path of inaction may seem easier today, but maintaining rates this low, for this long, could prove a much riskier decision tomorrow.”