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The Bank of England Keeps Interest Rates at 321-Year Lows

Interest-Rates / UK Interest Rates Nov 05, 2015 - 02:16 PM GMT

By: Mario_Innecco


We hear constantly from the U.K. government and mainstream publications like the Financial Times that the economy of Great Britain is recovering strongly and that the labour market is robust so it is probably surprising for many people that in spite of the strong growth in the U.K. economy that the Bank of England has kept its base rate at 0.5%. This almost zero interest rate has been kept since March 5th, 2009 when the MPC or Monetary Policy Committee cut the base rate from 1% to 0.5% and at the time it was understandable as the U.K. financial system was on the brink of a total meltdown and the U.K. government had to write a cheque and issue loan guarantees for £500 billion to bail out the big banks.

If the U.K. economy, as reported in the Guardian, “has rarely had it so good..” how come the Bank of England feels it needs to keep its base rate at the lowest level since its founding back in 1694? The Bank of England’s excuse is that their forecasts are telling them that inflation will stay low and below their target of 2%. In a normal world where the economy is supposedly growing strongly, where house prices are rising at almost double digit rates and inflation is low would it not be prudent to set interest rates higher than almost zero? At least that is how a prudent and independent monetary authority like a central bank is supposed to act. Why would the Bank of England feel like they have to debase the currency by 2% every year? Wouldn’t zero inflation give an extra 2% of purchasing power to the public?

So as one can see these questions we have asked are all very reasonable but do not expect Bank of England Governor Mark Carney to give you a straight answer as the real reason why the base rate has been kept at emergency levels is that the U.K. government, big banks and the public have an insurmountable pile of debt that is expected to hit £10 trillion soon and would be impossible to serve at normal interest rates. So what the U.K. government and the Old Lady of Threadneedle Street continue to do is extend and pretend. They keep telling the public the economy is doing great and at the same time engineering another house price bubble in the hope that the unsuspecting public will keep borrowing and spending in order to keep the fiat money debt wheel rolling along.

The other headline we have been hearing a great deal is how the U.K. government is cutting the deficit and how the Tory party is the party of fiscal rectitude. One thing Mr Osborne, U.K. chancellor of the exchequer, does not bring up very often is the U.K. national debt which is the result of all the budget deficits that have been accumulated by all U.K. governments throughout the centuries. In 2005 the national debt was less than £500 billion and in 2011, a year after the Conservatives took power from Labour, the national debt had doubled to just over £1000 billion or £1 trillion. Presently the national debt stands at £1600 billion or £1.6 trillion and that is just what the government owes! No wonder the Bank of England does not dare to raise rates!

Best regards,

By Mario Innecco
A Futures and Options broker in London for twenty years

Mario Innecco Archive

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