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02 July 2014
Talking Point: Low road

Talking Point: Low road

Homeowners should expect interest rates to return to their pre-recession levels within a decade, according to the Deputy Governor of the Bank of England.

The bank’s governor, Mark Carney, recently suggested that even once borrowing costs rise, the “new normal” for them to settle at would be around 2.5 per cent – significantly lower than the long-term average of 4-5 per cent.

But in an interview with Sky News last week, Sir Charlie Bean, the bank’s longest-serving senior policy maker, said that this lower rate was only caused by a range of temporary factors. Sir Charlie said that in the “long term”, meaning beyond five or ten years, it could easily rise again towards 5 per cent – the level traditionally considered “neutral”.

“It might be reasonable to think that in that long term you would go back to 5 per cent but it’s probably quite a long way down the road,” he said.

Sir Charlie’s comments were welcomed by savers who have suffered ever since the bank lowered interest rates to just 0.5 per cent five years ago. However, they may also alarm millions of mortgage holders who may struggle to make their repayments. A rise of one percentage point would mean extra mortgage, credit-card and personal-loan payments of around £14bn, or around £500 for every household, according to The Economist.

The deputy governor, whose term came to an end last Monday, also said that markets’ expectations that the first increase in interest rates would come at the turn of the year seemed “reasonable”. He added: “The market has rates going up to 2.5 per cent over the next three years. That seems like a broadly sensible judgement.”

Sir Charlie also admitted that in the run up to the crisis he, along with other economists, was “not sufficiently cognisant of the risks building up in the financial system”. However, he said that he was leaving the bank in safe hands, and the economy far more resilient than when he arrived in 2000.

The low-rate recovery is mixed news for Chancellor of the Exchequer George Osborne. Persistent low pay allows Labour critics to say that Britain’s recovery has done little to help workers. He can point to healthy employment figures and that the larger workforce also boosts tax receipts, helping trim the deficit.

But savers, many of them Conservative voters, are a political problem: 50 per cent of over-60s reckon they would be better off after an interest-rate rise, according to a recent poll. The magic elixir for coalition ministers would be a combination of growth, higher pay and rising interest rates, observed The Economist: “They are unlikely to get it.”  

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