Bank Of England Advisor: I’ll Never See Interest Rates Above 5% Again

Bank of England Monetary Advisor Gertjan Vlieghe said he does not expect UK interest rates to return to pre-2008 financial crisis levels during his lifetime, partly due to the effects of an aging population.

Vlieghe, said that prolonged life expectancies and therefore the need for longer retirement periods have increased the demand for adequate and safe investment assets, pushing down long-term interest rates in developed economies, including the Great Britain. In practice, pension funds are getting bigger and bigger, offering more and more money, and this causes interest rates to drop.

Vlieghe, answering questions from Durham Universiti students, had no doubts about how to answer a question about interest rates. Will we see them above 5% again? "Maybe not in my life".

“Actually, if you look at the long-term data on interest rates, it's the 1970s and 1980s that have been unusual decades. Interest rates were unusually high then, ”he added. Indeed, interest rates have historically been lower, but also because historical economic growth has always been slower than in the last decades of the 20th century.

The 30-year UK government bond yields, which give an indication of the return on safe assets in the UK, are now just over 1%. Vlieghe added that it does not mean that rates will not increase in the future, but that this change will not reach 4% or 5%, common values ​​before the 2008 financial crisis.

"I think one of the main drivers of this is demographics," he said. “It doesn't mean that interest rates don't rise from current levels. It just means that when they go up, they don't go back to 4 or 5%. The BoE's benchmark rate is currently 0.1%, when before the 2008 crisis it was 5.75%.

In the short term, Vlieghe said the BoE should cut interest rates below zero by the end of the year if there is a persistent slowdown in the job market, confirming valuations that the BoE has made public for the first time. Friday. Negative rates would be a nice change in British monetary policy. But will this choice be useful?

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This is a machine translation of a post published on Scenari Economici at the URL on Tue, 23 Feb 2021 09:00:56 +0000.