Posted on 7 October 2010 by
Now that Bank Rate has remained at 0.5% for 19 months a new milestone has been passed. Bank Rate, which has had various names over the years, has now been unchanged for the longest period since the Second World War.
After a false dawn when Bank Rate rose rapidly from 2.5% in July 1931 to 6% on 21st September 1931 it started an almost equally rapid decline in February 1932, bottoming out at 2% on 30th June 1932. This was then the lowest Bank Rate had ever been and as a result of the Great Depression it remained at 2% until 24th August 1939, just a few days before the outbreak of war, when it was increased to 4%.
However, this increase was not sustained and two months later, on 26th October 1939, Bank Rate returned to 2%, where it remained not only for the rest of the war but until 8 November 1951. It seems unlikely this record of no change in Bank Rate for just over twelve years will be beaten this time round but it is perhaps worth noting that during the last period of severe austerity Bank Rate remained unchanged for over 7 years from June 1932 to August 1939.
The authorities can draw on the lessons of the 1930s and have more tools at their disposal now and so there are reasonable grounds to expect the current period of austerity will be shorter. However, as highlighted this week by the Council of Mortgage Lenders, there is a real danger that policy mistakes such as over exuberant mortgage regulation in response to past regulatory failure will drag the economy down further and hence delay the recovery.
This all adds support to our view that Bank Rate will remain low for a long time and when it does start to rise the increases will be slow.
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