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Low interest rates:- do the risks outweigh the rewards?

Posted by: katalysis

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The Bank for International Settlements (BIS) is the Bank for Central Banks including our Bank of England. With a remit to promote stability in world banking you have to be concerned when it highlights the risks associated with current ultra low interest rate policies. Low rates and cheap credit got us into this mess in the first place resulting in a search for yield which in turn saw house prices boom. BIS observes that low rates allow High Street Banks to make super profits and thus rebuild their balance sheets (assuming they don’t blow it on bonuses). Not difficult if your business involves borrowing short-term money at less than 1% and lending long at 5%. However, if you leave rates too low for too long you risk creating an even bigger “bust”. On the other hand if you raise rates too fast and unexpectedly then you frighten the horses of recovery. So BIS says:-
“Signalling policy rate changes early can help to allow markets and institutions to make a smooth adjustment to the anticipated shift in asset prices and funding costs”.
Coincidentally at the last meeting of the MPC Andrew Sentence voted for a 0.25% rise in base rate thus signalling the beginning of the end for ultra low rates.
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