The reason for low interest rates

IN: Business news

Sir Mervyn King touched upon the real reason for low interest rates when he made his final Mansion House speech to the city last month before he retired as Governor of the Bank of England.

undefinedSir Mervyn told the audience that the reason that interest rates have remained at a record low of 0.50 per cent since March 2009 was that a “rapid return to higher interest rates would do great damage to the balance sheets of highly indebted households, companies and, especially, financial institutions.”

In his speech Sir Mervyn said: “Since 2008, the Bank’s Monetary Policy Committee has gone to extraordinary lengths to stabilise the economy and support growth and employment.

“The present extraordinary monetary policies cannot, however, continue indefinitely. Both nominal and real interest rates are at unsustainably low levels.”

It has however, protected indebted homeowners and allowed the overall cost of a mortgage to fall which has helped households cope with the small or non-existent pay rises that many employees have experienced over the last few years and the rise in costs of food, petrol and energy.

The UK has encouraged property ownership and for people who purchased their homes in the 1980’s and 1990’s and were able to ride out the recession and high interest rates of the 1990’s, many have been able to pay off their mortgages and sit on a tidy profit as house prices began their decade long rise in the mid 1990’s.

For younger people in the years before the credit crunch, many had aspirations of following their parents. However, for people who bought homes close to the peak of the market, at a time when some financial institutions allowed borrowers to overreach themselves, a sharp rise in interest rates is a very frightening prospect.

Base rate has been low to help stabilise the economy and to allow indebted homeowners to stabilise their personal balance sheets, but this has been to the detriment of people relying on savings income, an issue which Sir Mervyn has spoken about in the past and said he has much sympathy with.

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