In Samuel Beckett's Waiting for Godot, Vladimir and Estragon, wait endlessly and (spoiler alert) in vain for the coming of someone named Godot. The storyline bears some resemblance to central bankers’ behaviour on the rise of interest rates.
Savers and investors are like Beckett’s lead characters and are banking on a rise at some point. For everyone else, such a thing would represent a perilous step into potentially recessionary waters. With no real inflation, low oil prices for the foreseeable mid to long-term future, and no persistent wage inflation to speak of, the game is to uphold the expectation that current low interest rates will be increased again at some point in the future. If savers and investors buy this story, they will sit tight for fear of the volatility elsewhere. The clever bit is to to tell this story and continue to postpone rate hikes into the future without killing the expectation that rates will rise at some point. Something like a seven two vote to hold at the MPC normally does the trick.
So how will we save? Workplace pensions, with their employer matched contributions, will go a long way to deliver long-term savings, investment in the markets, and keep wage inflation down to boot. Savings will be tied to company profitability rather than interest rates on deposit accounts. A cheaply leveraged company can still pay 3, 5 or 10% matched contributions. Stock markets benefit from the injection of cash and companies can grow more cheaply while employees save for later years. No need to raise rates.
All the evidence suggests we have no real desire to lift rates while debt remains embedded in our economy and other asset groups and jurisdictions remain so volatile. Cheap debt remains our only option if we cannot inflate it away. Also money is still pouring into London and suggests that for steady returns within the rule of law we are delivering what the UK and international community require. Even if rates do rise there is every likelihood that the pattern of the past (rise followed by rise) will not repeat. A 0.25% rise may well be followed by a 0.25% cut.
That is a way off yet. With so much fiscal engineering underway, the political will to move interest rates at the moment looks thin. It's a very blunt tool to manage a UK economy with so many regional differences. What is good for London is not necessarily so for Manchester or Nottingham. Devolution and the envisaged rise of the northern powerhouses do not need higher interest rates but a stable environment for development that offer solid investor returns.
And finally we have the EU referendum, a ‘Yes’ vote represents a huge unknown systemic risk in the UK’s economic performance and surely weighs on policy makers’ minds in the run up to the event. If we do vote ‘Yes’ I suspect a cut is on the cards.
Of course I may be wrong but economics has a history of turning to spreadsheets when it ought to be looking at politics. The case for a rise is thin at best and unlikely to improve over the next 12 months. Like Beckett's characters I wonder if it will ever turn up.
