Will the Bank of England be cutting interests rates to 0%?
One of London’s biggest government bond investors has predicted that base rates will be cut to an unprecedented 0% by the end of summer. The prediction is also that stimulative money-printing cannot be ruled out.
Is this the way to go for the UK central bank? In some ways the 0.5% base rate is high. In Switzerland, Denmark and Japan rates are negative.
Rate cuts are supposed to stimulate spending but, at 0%, can have the opposite effect. The countries mentioned above are all saving more than before as people worry about future income.
QE can also distort markets as the extra money can cause financial bubbles to form.
The UK Chancellor has abandoned plans to ‘balance the books’ by 2020 and this has been well-received by markets as the policy was thought to be too restrictive.
Lower bond yields push down future borrowing for governments and companies but can cause chaos for pension funds. The Japanese Pension Fund is on track to report a $49 billion shortfall in the next few days.
The aggregate shortfall in UK final salary pension funds has worsened by £100 billion to £341 billion in the past 12 months.
We need to trade ourselves out of these problems. Cutting is never the real answer (although it can be the easiest).