Low inflation figures will delay the rise of interest rates

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The UK inflation rate fell to 1.9% in January which is being linked to the Bank of England’s message that there is no rush to raise interest rates.

Low inflation figures will delay the rise of interest rates and therefore it should be good news for banks.  The longer the interest rates stay low, the easier the highly indebted UK households will be able to serve their mortgage and consumer debt.  Banks are then less likely to suffer loan losses.  However, for the long-term health of the economy this is bad news because UK households will not save.  The cause of the crisis was high indebtedness and bubble in the real estate sector.

This government chose the easy and dangerous way to keep the economy afloat.  In addition, low inflation does not mean higher living standards.  Cost of living and wages do not improve and, in the longer-term, what creates economic growth is high wage-led consumption.  With this announcement, banks are simply delaying their problems because these low interest rates are artificial and do not convert to private sector investment.

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About Author

Ismail Erturk

Ismail joined the School in January 1987, having worked previously for a merchant bank in Istanbul. Ismail is a regular commentator in the broadcast and print media. He has taught corporate finance, bank financial management and international finance on both the School’s MBA and Executive Centre programmes. His research interests are in financialisation and financial innovation.

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