Is a 2% base rate the long term 'norm' for interest rates?
The Bank of England and the European Central bank both announce interest rate decisions around noon today. The BOE will hold at the record .50% but the ECB may be tempted to cut to alleviate the negative economic fallout for the EU of the Ukraine's troubles.6 March 2014
Interest rates have not been this low, for this long, in the 300 year history of the Bank of England. With a rapidly strengthening economy it will become increasingly difficult for the BOE to justify no change, although the Coalition government will not welcome a rise in borrowing costs ahead of the May 2015 elections, making government debt harder to service and slowing down the deficit reduction programme.
House prices and inflation will be key, as the bank will want to see productive slack taken up in the economy before risking any move that might dampen the nascent recovery.
Is there a right level for interest rates? A question that is almost impossible to answer because it depends on the prevailing economic circumstances. Perhaps there is a clue in the long term history of interest rates. The record for stability is a run from 1932 to 1951, where interest rates stayed at 2% for 19 years.
Intuitively 2% feels like a sensible long term norm if savers are to receive any kind of reward for doing the right thing, whilst borrowing costs are contained at manageable levels when considered through a long term lens.