Next year marks the 30th anniversary of Black Wednesday, a momentous day in history. 16 September 1992 will be forever remembered as the day Britain was blown out of Europe’s exchange rate mechanism by foreign currency speculators led by George Soros.
John Major’s government sought to fend off the attacks by using Britain’s reserves to buy pounds and by raising interest rates. The day started with official borrowing costs at 10% but during the morning of Black Wednesday they were raised to 12% and later it was announced that they would be further increased, to 15%, the next day.
In the event, that move never happened because the battle to keep the pound in the ERM had been lost by then. But seen through the prism of Thursday’s decision by the Bank of England to leave interest rates on hold, the contrast with today’s monetary policy could hardly be more stark.
In the late 1980s and early 90s, policy was considered loose when interest rates were cut to 7.5% and tight when they stood at 15% – as they did for an entire year in 1989-90. When rates changed they did so in one percentage point jumps (Black Wednesday being an exception). There was no messing about with quarter-point increases and there were periods when borrowing costs were changed monthly.
Last week, the Bank was deliberating about whether – in the face of inflation expected to hit 5% by the spring – it should raise rates by 0.15 points, from 0.1% to 0.25%. In the end it decided to leave things as they were, while making it clear that action was very likely in the coming months. Rates are expected to rise next year but not by all that much. Interest rates have not been as high as 1% since early 2009, when aggressive cuts were enacted in the aftermath of the global financial crisis.
There have been times in the past when interest rates have remained low for a long time. Between 1932 and 1951, the only time borrowing costs went above 2% was in the period immediately after the outbreak of the second world war, and even then the move was quickly reversed.
It wasn’t hard to find some positive benefits of this cheap-money policy. Low interest rates stimulated a private sector housing boom in the 1930s, made it less onerous to finance the cost of the war and enabled the postwar Labour government to fund the welfare state.
So the question is this? If, as seems highly likely, low interest rates will continue until the middle of the decade and beyond, what benefits have there been? Not a higher growth rate, that’s for sure. The Bank believes the economy will grow by 7% this year and 5% next but that’s merely catchup after the 10% drop in output in 2020. Once this process is over, the economy settles back to grow at 1.5% in 2023 and 1% in 2024.
The Office for Budget Responsibility is expecting something similar, with growth averaging about 1.5% a year between 2024 and 2026. It is not only that these are weak by UK standards, they are weak by international standards as well. As Labour has noted, on the basis of the Bank’s estimates, in 2023-24, Britain is on course to have the lowest growth rate of any nation in the rich-country Organisation for Economic Co-operation and Development club apart from Japan. Bridget Phillipson, the shadow chief secretary to the Treasury, says after more than a decade of Conservative rule, Britain is a high-tax, low-growth economy. Free market thinktanks make the same point.
Of course, there are those who would say slower growth is something to be welcomed rather than bemoaned because making a fetish of gross domestic product is the reason the eyes of the world are on Glasgow for a climate change deal. The fact is, though, that the government is not pursuing a no-growth or de-growth agenda. The prime minister and the chancellor talk of a dynamic, sustainable, high-growth economy but the reality is Britain has the highest taxes since Clement Attlee was prime minister coupled with even lower interest rates than in the 1930s and 40s, and not a lot to show for it.
Maybe this is over-gloomy. The current low interest regime is not only a British phenomenon because everywhere in the developed world the level of borrowing costs consistent with low inflation has come down markedly, notwithstanding the cost of living increases caused mainly by higher energy prices.
Britain is doing pretty well in some of the industries of the future – green tech startup, genomics, artificial intelligence, for example – and will be better placed than rival countries to exploit the opportunities provided by the fourth industrial revolution.
It has to be said, though, that it is taking a long time for the UK’s scientific excellence to bear fruit. If, after 15 years of ultra-low interest rates and almost a trillion pounds of quantitative easing the economy is only growing by 1% a year, it suggests that the small high-tech startups of a decade ago are failing to realise their full potential. It is a depressing thought that the stimulus provided by the Bank of England since late 2008 has done far more to boost house prices than it has to boost productive investment.
When asked whether the stimulus of the past decade or so has been worth it, policymakers normally take refuge in the “what if” argument. Look at the counterfactual, they say. Growth would have been weaker and the dole queues longer had we not kept our foot to the floor. This is no doubt true but it is not saying all that much.