Falling Interest Rates: Too good to be True?


Oxford_High_Street_shoppersInflation is the decline in the value of money. Significantly, it is currently at 0%, the lowest since modern records began. Significant enough to beg the question, why the decline?

there are a number of reasons. Firstly, there is the collapse in the price of oil and therefore the fall in transport costs. Secondly, the Office of National Statistics recorded in February a raft of falling prices, across a spectrum of household commodities: food stuffs, non-alcoholic drinks, furniture, books, games and toys. The price of electronic goods has also fallen or remained stable for a long length of time. Finally, there is the strength of Sterling (overpriced) against the Euro, thus reducing the costs of imports into Britain. All this means spending power in the UK has increased.

But is a zero percent level of inflation a good thing long or even medium term? The answer is: not really.

Zero inflation indicates a period of price stagnation and hence profit stagnation, quickly leading to a halt in pay rises in an already low wage economy. It also means that firms have little or no incentive to begin capital investment.

It quickly affects consumer expenditure; if we calculate that prices will continue to fall for any length of time we tend to delay future purchases, particularly of household goods (e.g. washing machine, T.V’s, etc.). This pattern of delayed gratification depresses the economy still further and again the trend towards modest wage rises and increased employment prospects weakens.

It also means that interest rate rises for savers are postponed or can lead to more quantitative easing through the Bank of England.

Perhaps the most serious problem for the British economy is the continual rise in imports. This indicates persistent low productivity in UK.

We remain a country not paying our way in the world by our inability to balance imports by competitively priced exports.

 

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Terry Jones taught History to adult students taking Foundation courses at a College of Higher Education prior to their entry into full-time degree courses at Warwick and Coventry Universities. Since taking early retirement, he has travelled widely in Eastern Europe, pursuing a life-long interest in 19th and early 20th century European history. He has been a GCSE and "A" level tutor with OOL since 1996.

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