SIMON WATKINS: Interest rate rise is real test of a recovery

By Simon Watkins


Opinion: The International Monetary Fund's Christine LagardeLagarde

Opinion: The International Monetary Fund's Christine Lagarde

The International Monetary Fund changes its mind so often it is hard to know what it thinks about the British economy. Last week it issued its latest formal verdict and managed to come up with something for everyone.

It noted an ‘improvement in economic and financial conditions’, which was ‘encouraging’. But it also warned: ‘The UK is still a long way from a strong and sustainable recovery.’

Sadly, I suspect the latter comment is the more important point and the unbalanced and fragile nature of the recovery and financial confidence, not just in Britain but around the world, was made clear by last week’s stock market gyrations.

The IMF has changed its mind on Britain’s economy so frequently in recent years that, increasingly, many economists are dismissing its reports.

Two years ago, it was a cheerleader for British austerity. Earlier this year, one of its most senior economists warned the Treasury that its measures were ‘playing with fire’. Last week’s report seemed like an attempt to placate everyone.

On balance, though, it was not an optimistic document. Its emphasis was on the fragility of the recovery and that fiscal tightening (IMF-speak for austerity) ‘will be a drag on growth’.

There have been signs of recovery in Britain, but all too easily we forget that the economy is, along with those elsewhere, still in intensive care. The slump in shares prices around the world last week was a reminder of that.

The most credible explanation for the falls was that traders took fright at suggestions by America’s central banker, Ben Bernanke, that it may soon be time to stop quantitative easing  – better known as money printing.

This policy, carried out by the central banks buying up assets with newly created money, has been pursued by many, including the Bank of England, alongside rock-bottom base rates, currently 0.5 per cent in the UK.

While these policies of monetary easing may be necessary, they have not brought back strong economic growth. They have also had side effects, such as a stock market boom.

Much of the money injected  into the system has been used to buy shares and it is the idea  that this money tap might be turned off that has scared the stock market.

The equivalent for most of the rest of the economy would be the expectation that interest rates are about to rise. How many companies would fail if we returned to base rates at three, four or five per cent? How many of us could keep paying our mortgages if that happened?  What other spending would we have to cut?

Fortunately, for most of us, rates are not expected to rise soon. But this is not a sign of strength – it is a sign of the economy’s weakness.

Forget trying to decode the IMF, the easiest test for when we have a sustainable recovery will be when businesses and households can contemplate higher interest rates without fear.

The comments below have not been moderated.

Hmmm, we are not ready yet as a country for interest rate increases? Well the FTSE is hitting all time highs, so what happens when it has a massive correction? If bonds, commodities, property markets and shares are all in a bubble, where the hell are we supposed to put our money? Its certainly not going back into the bank for less than 5% interest.

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Some argue that if we connect the dots Low interest =no income =no spending=no growth and then tell us that inflation adjusted pensions dont compensate pensioners because the they dont buy items included in the governments CPI estimate as the bulk of their spending is on food/energy costs-Contradiction or not? Government budget deficit is £120Bpa and total debt will be over £1T so who will suffer most from an increase in interest rates? When the deficit increases due to rising interest rates what do you expect to happen to all welfare benefits and essential service like the NHS? The benefit to prudent savers, particularly pensioners, will be short lived as the economy deteriorates as the £ falls and food and energy costs rise and the government is ordered by the IMF to further reduce benefits - As in Greece! So be careful what you moan for as they could be far worse. My father in law is 87 and I have never heard him moan once - he just asked if there were any other saving options!

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How about not getting into an economic mess in the first place. Surely that is far more of a test? The interest rates will go up when the stone has been bled dry.

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Simple Simon met a pieman ect ect ect.

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You say that fortunately"for most of us" interest rates are not expected to rise soon.This is wrong for statistically there are many more people who would gain from an interest rate rise than would suffer.

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Zombies need a steak through the heart --thats the best thing for them --the grave. You can help the weak but not stop for them.

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An interest rate rise would be a stake through the heart for the Zombie companies and the Tories claim to falling unemployment,thus it's unlikely to happen.This side of the grave at any rate.

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John if you think CPI = inflation you really have to think again Even the ONS admit Pensioner inflation is over 7% CPI on just £66 a week or if your lucky £110 a week state pension simply will not begin to tackle the increases in the most basic costs of food and energy

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There are accounts now paying 5% REALLY do tell us where ?

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It does'nt matter what the BOE says. There are accounts NOW paying 5% thats 4.5 above base. This will slowly become normal as banks spend QE. Higher rates are coming --slowly but coming.

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