Interest rate changes may not matter as much as we think

Will a quarter of a per cent either way make any difference? It seems unlikely

On Thursday, the Bank of England will announce whether its Monetary Policy Committee will change interest rates. A week or so ago, the betting was that it would drop its base rate from 0.75 per cent to 0.5 per cent. Now, with strong job growth figures and a sharp rise in business sentiment since the general election, that seems less likely. Yet would a quarter of a per cent either way make any difference? I can’t see many people deciding they will buy a house after all because the mortgage rate might be a fraction lower, or companies deciding to invest in a new bit of kit because their overdraft rate was down a bit. Indeed, the fall in rates might have to opposite effect: if the Bank of England seems more worried about the economy, maybe we all will be.

Across the Atlantic, Donald Trump insisted at Davos that, were it not for the Federal Reserve’s mistaken decision to raise interest rates, his economy would be growing at 4 per cent and the Dow Jones index would be 10,000 points higher. Attacks on the Fed by the president have become commonplace (though fortunately, its independent position is pretty secure within the US constitution). However, ask yourself this: the Fed’s key rate is now 1.5 per cent; if it were still 2 per cent, as it was for the first half of last year, and as Trump wished it still were, would growth really be much lower than it is now? Or if it were 1 per cent now, would growth be much higher?

Now to Europe. The European Central Bank (ECB) has negative interest rates, in that banks are forced to lose money on their reserves that they have to deposit with it. Unsurprisingly interest rates in the eurozone are extremely low. But the eurozone economy is struggling. It is projected by the International Monetary Fund to grow slightly slower than the UK, both this year and next. Would making interest rates on the euro even more negative boost rates, or might that have to opposite effect?