A dose of reality is needed in our low rate fairyland

14 June 2010

Many clients will see an increase in the Bank of England base rate as a pivotal moment for their financial situation, particularly if they have been repaying their mortgage by sticking on their lender’s SVR or have had the luxury of a base rate tracker.

For that reason a hike may appear to be something to be feared and a move which could have a detrimental impact on a significant number of borrowers.

But while this will be the case for some, any increases are likely to be gradual and limited due to the political need to offset the effects of a marked tightening in fiscal policy.

So both a base rate increase and any measures to cut the deficit may be looked on unfavourably in the short term but they are positive moves for the economy in the longer run.

There may be a tendency for some readers to shout ’you would say that, wouldn’t you?’ at this point.

But the truth is that given the country’s economic situation there need to be big changes and the current base rate does not reflect the reality of the situation.

Optimistic public sentiment is key to a growing economy so we need a positive view - dare I say spin - on why belt tightening is necessary.
The belief that a base rate of 0.5% is normal and can be sustained in the long term is as wrong as thinking it is acceptable to live off benefits or subsidies for extended periods. It’s not healthy for individuals and it’s dreadful for the economy.

So while for some an increase in the base rate may appear to be a catastrophic prospect, for UK plc a modest and tiered rise starting in Q4 2010 and ending 2011 at 2% would represent a recognition that the recession is firmly behind us.

Everything comes at a price and the sooner we start to pay this rather than hiding behind the sofa of unsustainable lending rates, the better for all.

Surely it’s better to come out now with positive plans to cut the public sector deficit in a measured way and create an expectation of normality after adversity rather than live in perpetual low base rate fairyland.

We’ve all known that unnerving moment where we are told by a doctor to expect a sharp pain and then more extended pressure to follow.
But we recognise the benefit to be gained and gladly accept the vaccination or, as some call it, booster shot.

And we certainly need to be boosted out of the surreal status quo that prevails in the country.

The medicine we will be forced to take is not going to taste great but without doubt it will provide us with a healthier economic body in the future.

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