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Third, the lower the return on interest deposits, the more an individual needs to save to maintain a given income. In an environment of low interest rates, everyone is pulling their horns. Negative rates are likely to be even worse. All these factors tend to slow down economic activity.
Little or no inflation also acts as a brake on economic recovery. People tend to postpone spending if they are not worried about prices going up. In fact, the increase in online purchases has caused strong competition that has caused the prices of some products to fall.
Low interest rates increase the value of capital assets like property or stocks. In fact, equity markets have produced good returns since interest rates were slashed more than a decade ago. Unfortunately, this has widened the gap between the “haves” and the “have-nots.”
The only group that benefits from low interest rates are borrowers. Given that our government is borrowing on a larger scale than ever before, it is fortunate that the interest it has to pay is an order of magnitude less than it would have been otherwise.
It is time for the central banks of the US, Canada, Japan and the EU, as well as the Bank of England, which are supposed to be independent of their respective governments, to send a signal that the next movement in interest rates interest will be towards a gradual increase. (Coordination is needed to avoid the risk of a disruptive competitive devaluation.)
This signal would reverse the trends described above and could also, contrary to conventional theory, encourage a modest revival in inflation. This in itself would be welcome, as inflation is the best way to reduce the national debt.
Another benefit of modest increases in interest rates would be to make banking more profitable. This is necessary. Profitable banks are safer and increasingly likely to lend money to businesses that need it.
A vicious cycle could turn into a virtuous one.
Sir Martin Jacomb, is a former Vice President Kleinwort Benson and former Vice President of Barclays
