With near zero Bank of England base rate on the horizon Interest rates are no longer the economic growth adjuster they once were, their dying effectiveness as a means of economic central bank control is encouraging a new paradigm of monetary policy.
For nearly 40 years interest rates have been the favored economic lever that Policy makers have used to shepherd the economies of the western world to increase or retard growth.
Economic theory leads to us to believe that interest rates are the price we pay for instant gratification. Lower rates should therefore encourage us to spend more and save less.
Right back to the reign of economic liberals such as Thatcher and Reagan the thinking has been that as interest rates fall consumer spending rises. Unfortunately this is no longer the case. Consumers are probably more controlled by high debt levels, bank whims and their credit worthiness than interest rates.
Businesses too seem largely disinterested in low rates, as investment decisions have ramifications for many years corporate leaders may be more focused on shaky future growth and risk than the benefits that low rates may bring.
Savers too have seemed unresponsive. Whilst low rates have reduced incomes on money left in the bank and pensions, it is likely that rising healthcare costs and longer life spans have meant that many savers have decided to save more to counteract this rather than do as the central banks want and spend.
The new world levers which the Bank of England seems to be relying on seem more effective. Loans from their coffers at very low rates to lenders which are mandated be loaned to consumers and corporates at almost equally low rates seem to be a new weapon. QE another.
If however central banks are going to continue to be able to apply an effective source of economic control they will need to develop new mechanisms to keep their monetary policy buttons effective.
We are entering a new economic Paradigm.
