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Thursday, 15 June 2017

Rates of Interest

In a much-heralded announcement, the Board of the US Fed has raised its basic interest rate by 0.25%. This tiny change has great significance. After almost a decade while it was at its lowest ever, as one of the two components of the 'rescue' of the US banking system after the crisis of 2007-8, the maintenance of almost-zero interest was considered vital to support the entire financial system. The move away from that minimum is seen as a major indication that the Fed Board is confident that the 'recovery' of the financial system is well advanced.

Through most of the ten years while rates were held low, business in general has continued more or less as was normal before the credit crunch occurred. The oil and motor businesses have had their ups and downs, and the 'technology' giants - Apple, Google etc - have displayed phenomenal growth. The stock market has moved to new heights, the rich have got richer and the poor have survived.

In the United Kingdom, where rates were reduced as much as in the United States, at exactly the same time, there seems to be no prospect of an increase in interest rates in the near future. There is little sign of a 'recovery' in the material economy, though the stock market is at a record high. The strength of the stock market is partly due to the fact that a very large proportion of the earnings on shares that are listed on the London market comes from global economic activity outside the UK, and partly due to the decline in the exchange value of the pound since the Brexit referendum which makes those overseas earnings even larger when the gains made in other countries are converted into pounds for recording purposes.

One aspect of the British situation that is more marked that the US equivalent is in house prices. The availability of money-to-borrow at historically low interest rates has enabled people who have jobs and modest deposits to bid higher and higher prices for residential property. In London and a few other centres the demand for properties at the 'higher end' of the market has been stimulated by foreign buyers who want to put some of their fortunes into the 'safe haven' of the UK. London is one of the safest places in the world, regardless of recent terrorist incidents and the horrific fire yesterday, and the flow of money into the property market. Property developers build for their most affluent customers, so much new property is purchased by aliens - much of it 'off plan'. The effect of these forces is that an increasing proportion of the native British population is excluded from being able to buy homes, especially in London. Thus competition for dwellings has been shifted to the rental market, where prices have spiraled.  This has created a massive social problem, which spills over into political discontent. Government has ignored the issue for several years; that cannot continue. The present impotence of the government makes it unlikely that they can act: so the resentment will grow. Labour gained London seats in the recent election, and that trend will continue.

So the interest rates issue, which is being resolved in the USA, remains a major problem for Britain. It must be addressed soon.

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