Outlook: Britain's uncompetitive interest rates

Click to follow
The Independent Online
MEMBERS OF the Monetary Policy Committee must have appreciated by now that nobody is ever going to thank them for what they do. They have responded rapidly to the global slowdown by cutting rates 1.25 points in three months - a distance that took a year to cover on the way up. And the reaction? A grudging welcome at best. Half a point is better than nothing, but UK rates remain more than twice as high as those of our European partners.

The gap is a yawning one. Another 3.5 percentage points off mortgage rates would put nearly pounds 150 a month back into the bank balance of the typical UK home-buyer. Not all of this can be considered the price Britain pays for staying outside the first wave of the single currency.

In part is also reflects the fact that the UK economy is at a much later stage of its business cycle. There is a less dramatic differential - "just" 1.5 points - between US and UK rates. If growth recovers as expected in Euroland, interest rates there will eventually rise, and this might well be at a time when British loan costs are still falling.

All the same, for the time being the UK faces a big penalty for its combination of poor inflation record and decision to stay out of monetary union. The gap between mainland and British long-term government bond yields is about 70 basis points, reflecting the combination of higher expected UK inflation in future and the risk that the country will never get round to joining the euro. German bond yields have fallen almost as much as UK yields during the past year, despite the cyclical differences.

So business leaders were right to complain yesterday that they still have to pay far more than their rivals on the Continent to borrow money. Despite this, the Bank cannot realistically opt to match the European Central Bank's interest rate. As things stand, all it can sensibly do is continue the painstaking work of building strong inflation-busting credentials. Interest rates will only come into line with Europe when Britain joins the rest of Europe in the single currency, a decision that lies in the hands of the Bank's political task-masters.

Comments