Low Interest Rates: Celebrating Failure
…what is good news about what Mark Carney is effectively saying is, look, the government is doing the right thing by taking difficult decisions to get the deficit down and therefore we can have an aggressive monetary policy that says I will keep interest low until unemployment falls even further.
Simon Wren-Lewis has already comprehensively debunked this claim – the Bank is very clearly saying nothing of the sort.
But the Prime Minister’s argument is becoming worryingly familiar from this government. The Chancellor’s most recent Budget statement again and again emphasised how low interest rates currently are.
It’s almost as if low interest rates have become a good in and of themselves.
A constantly repeated mantra from the government is now that “interest rates are at record lows” and that any attempt at fiscal stimulus would put this at risk.
Of course in a way this is true – any successful fiscal stimulus would mean higher interest rates down the line – but it is also disingenuous to say the least.
Record low interest rates are not a sign of a healthy economy; they are sign of a distressed economy that is struggling to grow.
The real message of last week’s Bank of England press conference is that the Bank thinks there is an awful lot of spare capacity in the economy and it isn’t sure there is much it can do in the short run to deal with that.
Interest rates are set to remain at ‘record lows’ for the next three years not because things are going well but because unemployment is expected to remain at elevated levels until then.
When rates start to rise it will be sign that growth is picking up, wage pressure is picking up (which will be a very good thing) and things are finally starting to return to normal.
It is a depressing spectacle indeed when the Prime Minister and Chancellor are both reduced to celebrating an indicator of weakness as a sign of strength.