Does a rise in borrowing mean a return to normality?

There are several potential benefits to higher interest rates. Their rise might imply economies are on the move again, our Chief Economics Commentator says


Interest rates are on the move again. No, there’s no change in the Bank of England’s monetary policy and short-term rates seem likely to remain very low for some time to come. But the climb in longer-term rates seems to have begun and, depending on how far and how fast things move, this will have a profound effect on all of us.

Ten-year gilt yields are back above 2 per cent. By any historical standards, that is extremely low: far below current inflation and probably below most expectations for inflation for the next 10 years. But last summer the rate dipped below 1.5 per cent. That was the lowest since the Bank of England was founded in 1694. That already seems an aberration and it may well turn out that rates will never be as low again, certainly not in our lifetimes. So what does it mean?

There are two sets of forces at work. One is international, the other domestic. The rise in yields is part of a global trend, as last summer’s very low levels are seen as an over-reaction to fears of renewed recession in the developed world and a break-up of the eurozone. Thus the equivalent US rates dipped to 1.4 per cent in the summer and are now 1.9 per cent. German rates went below 1.2 per cent and have risen to 1.5 per cent. So the extreme fears – the need for a “safe haven” for cash – have receded.

There has also been a reassessment of risk between bonds and equities, for any fixed-interest security would be vulnerable to a rise in inflation, whereas not only do the shares of large companies provide a better current yield than government bonds, but they also give some protection against inflation.

But domestic forces are also at work. The Coalition’s progress in cutting the deficit looks worse now than last summer: notwithstanding the Chancellor’s claims, the underlying deficit seems to be rising, not falling. That may lead to a loss of the UK’s AAA credit rating, which might increase borrowing costs further. A more general concern is the UK’s poor growth performance, even allowing for the official GDP figures understating what is actually happening. And there are lingering concerns about the possible over-valuation of sterling, associated with its “safe haven” status, noted by Mervyn King. Any fall in the pound would, of course, damage investors in sterling-denominated debt.

What will be the effects of this? We can see some already: the cost of fixed-interest mortgages has started to rise not just here but also in the States. Any rise will also undermine eurozone austerity programmes and if rates climb sharply here, then our own austerity programme becomes all the harder to sustain. The one big number coming the Coalition’s way is the lower-than-expected cost of servicing the national debt.

On the other hand, a return to more normal levels of interest rates would have positive effects, too. Pensioners would benefit as annuity rates rose and pension funds themselves would benefit, too, partly for actuarial reasons, but particularly were the rise in bond yields associated with a rise in share prices. For most, the loss on holdings of gilts would be more than offset by a rise in equities.

More generally a return to more normal interest rates would signal a return to more normal market conditions: the world would be moving out of crisis and returning to some sort of normality. It is hard to know which way round the relationship works: are normal market conditions a response to normal economic growth or the other way round? Common sense suggests a bit of both.

Common sense also suggests that extreme monetary policies, carried on for years, start to become ineffective in their main aim, to boost demand. So a rise in long-term rates may not damage growth but actually be a signal that economies are on the move again.

No stopping the online revolution

Online shopping to the rescue – or not. It has been a mediocre Christmas for the High Street but a bumper one for online. As a result, overall sales seem to be up by about 1 per cent in real terms – not brilliant but not dreadful.

We seem to have become the most adept nation on earth at shopping online. Along with the Danes, it seems we make a higher proportion of our purchases online than anyone else. That has a number of direct consequences

High streets have to find a way of fighting back, which raises questions about business rates and parking restrictions. We have to recognise that this may be even bigger than the supermarket revolution: that in another 10 years, more than half of what we spend on goods will be done online.

If that is right, there will be huge consequences for land use, roads, international retail competition, advertising and so on. Shopping may go the way of other industries, with room at the top and at the bottom but not much in between. And slimming the distribution chain should bring benefits to all – unless you are a high-street bookstore, or are someone who likes to browse before you buy.

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Quantitative Analyst (Financial Services, Graduate, SQL, VBA)

£45000 per annum: Harrington Starr: Quantitative Analyst (Financial Services, ...

Application Support Engineer (C++, .NET, VB, Perl, Bash, SQL)

Negotiable: Harrington Starr: Application Support Engineer (C++, .NET, VB, Per...

C# .NET Software Developer (Client-Side, SQL, VB6, WinForms)

Negotiable: Harrington Starr: C# .NET Software Developer (Client-Side, SQL, VB...

C# Developer (Genetic Algorithms, .NET 4.5, TDD, SQL, AI)

£40000 - £60000 per annum + Benefits + Bonus: Harrington Starr: C# Developer (...

Day In a Page

Read Next
Jihadist militants leading away captured Iraqi soldiers in Tikrit, Iraq, in June  

Middle East crisis: We know all too much about the cruelty of Isis – but all too little about who they are

Robert Fisk
India's philosopher, environmental activist, author and eco feminist Vandana Shiva arrives to give a press conference focused on genetically modified seeds on October 10, 2012  

Meet Vandana Shiva: The deserving heir to Mahatma Ghandi's legacy

Peter Popham
Middle East crisis: We know all too much about the cruelty of Isis – but all too little about who they are

We know all too much about the cruelty of Isis – but all too little about who they are

Now Obama has seen the next US reporter to be threatened with beheading, will he blink, asks Robert Fisk
Neanderthals lived alongside humans for centuries, latest study shows

Final resting place of our Neanderthal neighbours revealed

Bones dated to 40,000 years ago show species may have died out in Belgium species co-existed
Scottish independence: The new Scots who hold fate of the UK in their hands

The new Scots who hold fate of the UK in their hands

Scotland’s immigrants are as passionate about the future of their adopted nation as anyone else
Britain's ugliest buildings: Which monstrosities should be nominated for the Dead Prize?

Blight club: Britain's ugliest buildings

Following the architect Cameron Sinclair's introduction of the Dead Prize, an award for ugly buildings, John Rentoul reflects on some of the biggest blots on the UK landscape
eBay's enduring appeal: Online auction site is still the UK's most popular e-commerce retailer

eBay's enduring appeal

The online auction site is still the UK's most popular e-commerce site
Culture Minister Ed Vaizey: ‘lack of ethnic minority and black faces on TV is weird’

'Lack of ethnic minority and black faces on TV is weird'

Culture Minister Ed Vaizey calls for immediate action to address the problem
Josephine Dickinson: 'A cochlear implant helped me to discover a new world of sound'

Josephine Dickinson: 'How I discovered a new world of sound'

After going deaf as a child, musician and poet Josephine Dickinson made do with a hearing aid for five decades. Then she had a cochlear implant - and everything changed
Greggs Google fail: Was the bakery's response to its logo mishap a stroke of marketing genius?

Greggs gives lesson in crisis management

After a mishap with their logo, high street staple Greggs went viral this week. But, as Simon Usborne discovers, their social media response was anything but half baked
Matthew McConaughey has been singing the praises of bumbags (shame he doesn't know how to wear one)

Matthew McConaughey sings the praises of bumbags

Shame he doesn't know how to wear one. Harriet Walker explains the dos and don'ts of fanny packs
7 best quadcopters and drones

Flying fun: 7 best quadcopters and drones

From state of the art devices with stabilised cameras to mini gadgets that can soar around the home, we take some flying objects for a spin
Joey Barton: ‘I’ve been guilty of getting a bit irate’

Joey Barton: ‘I’ve been guilty of getting a bit irate’

The midfielder returned to the Premier League after two years last weekend. The controversial character had much to discuss after his first game back
Andy Murray: I quit while I’m ahead too often

Andy Murray: I quit while I’m ahead too often

British No 1 knows his consistency as well as his fitness needs working on as he prepares for the US Open after a ‘very, very up and down’ year
Ferguson: In the heartlands of America, a descent into madness

A descent into madness in America's heartlands

David Usborne arrived in Ferguson, Missouri to be greeted by a scene more redolent of Gaza and Afghanistan
BBC’s filming of raid at Sir Cliff’s home ‘may be result of corruption’

BBC faces corruption allegation over its Sir Cliff police raid coverage

Reporter’s relationship with police under scrutiny as DG is summoned by MPs to explain extensive live broadcast of swoop on singer’s home
Lauded therapist Harley Mille still in limbo as battle to stay in Britain drags on

Lauded therapist still in limbo as battle to stay in Britain drags on

Australian Harley Miller is as frustrated by court delays as she is with the idiosyncrasies of immigration law