Anthony Hilton: A debate on a ‘normal’ interest rate? It’s bound to be inconclusive


Monday evening in the Mansion House for the annual City debate, where the main speakers were Chris Huhne and John Redwood.

With more than a touch of humour, the organisers had seated Mr Huhne to the right of Angela Knight, the former Tory minister and chair for the evening. Even harder to imagine was John Redwood, seated to her left.

The motion was to discuss whether it was possible for interest rates to return to normal levels without bringing on another financial crisis. It turned into an argument about whether higher interest rates would lead to massive mortgage arrears and the wholesale collapse of small businesses, with Mr Huhne suggesting it might and Mr Redwood not that bothered if it did.

More informative than the debate, however, was an email I received the next day from a fellow guest who questioned in a way the debaters did not just what we mean by a “normal” level for interest rates.

If you look at the 50-year moving average for the Victorian era the real rate of interest comes out at around 2 per cent, he said. That was also the rate throughout the early 20th century. Since then it has tended to be even lower, albeit as of now it is back close to the 2 per cent mark.

My fellow guest also pointed out there is no such thing as stability any more, which raises a further question of what “normal” means. Even a 50-year average (which is designed to remove the effect of short-term fluctuations) shows rates move in long-run cycles. Shorter-term averages show these are frequent and dramatic. In the past 100 years the 10-year average for interest rates has moved from a low of minus 4 per cent to 9 per cent in three distinct cycles.

It is true that official interest rates are artificially low at the moment with the Bank of England determinedly printing money to keep them that way. It is also likely that official rates will rise – possibly in a year’s time according to one of the Monetary Policy Committee members this week. But the reality is that most people who need money are already paying far more than the official rates would imply. Higher rates might well cause a spate of foreclosures and a fall in house prices. But it is emotion rather than evidence which suggests the problem is so widespread that it would spark another financial crisis.