Zero interest rates are moving closer, but maybe the way out of this crisis will entail new ways of saving and lending.
Well, it may only have been three weeks ago, but these days a week is a long time for the economy. Back on October 17, the headline here read: “Could interest rates fall to zero?” The article said: “In Japan, the response to deflation was a zero rate of interest. No one is yet predicting zero interest rates for the UK, but Capital Economics reckons rates will fall to 2 1/2 per cent. Today’s Telegraph led with a story suggesting rates could fall to 1 per cent, the lowest level since 1964. Maybe the key word here is ‘yet.’ No one is ‘yet’ predicting zero interest rates. Well, if this crisis has one single characteristic, it is that predictions keep getting downgraded. If deflation really does set in, then zero rates might be on the cards after all.”
Contrast the sentiments of that article with two views now floating around.
This weekend, Bloomberg headlined: “Zero Rate World May Lie Ahead as King, Trichet Cut.”
Then, this morning, Capital Economics put out its latest forecast for interest rates. Paul Dales, its UK economist said: “We continue to think that interest rates will fall to an all-time low of 1 per cent, although it now looks as though we will reach that level as soon as next summer. In fact, the events of the past few weeks have made it more likely that rates will end up having to go lower than that, perhaps even to zero as they have done in Japan.”
It is a tad irrelevant of course. As the Bank of E cuts rates, the commercial banks seem largely unmoved. But they will respond, eventually. The pressure from the government and media is too great for the banks not to respond.
However, we may not see the full 1.5 per cent cuts in commercial rates. It seems the gap between the LIBOR rate and official bank rate is widening. Therefore, in order to get commercial interest rates charged by the banks to the level the Bank of England wants, it may be necessary for the Bank of England to cut rates by more than it would normally do.
The media backlash against the banks at the moment is enormous. Bank chiefs must feel as if they are under siege. It seems that the day of their jollies in the sun must now be at an end – and recent bashes we have been reading about must surely mark some kind of farewell to excess.
And yet, while the banks’ senior staff play, we hear about collars. Now, there are those who think all bank chiefs should be forced to wear a collar and be kept on a short lead by the government. But this is different. It appears many tracker mortgages come with own their type of collar, which is supposed to limit the extent to which they have to lower interest rates. Normally that limit is around 3 per cent. So, it would appear, even if rates do fall to zero, tracker mortgages won’t fall below 3 per cent.
But, given that many banks are owned by the government now, and given that the media backlash against the banks is so intense, it is seems inconceivable that these collars will be enforced in the long-term. Not even a choke chain on mortgages will be enough to stop the banks from cutting tracker rates.
But zero rates will be a problem for savers. To solve the long-term pension crisis, we need to see two things happen. We need to see savings rise, and we need the money saved to be invested in areas that can create wealth for the future.
Continuing the conclusions from the article above, it does seem that, right now, there is an opportunity for new players in the finance arena. There are businesses out there with good prospects, but that can’t raise money. There are plenty of savers who want a better return on their saving. Maybe, as dissatisfaction with the banks grows, we will see the emergence of new companies which aggregate savings and lend to business. They will be like “business building societies.”
That really is the point about capitalism. Failure is the means by which we learn to change. Banks have failed. Maybe we need to see a different way of doing things.
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