As CPI remains stable at 4.5% and the Bank of England’s base rate remains at the low 0.5% there have been calls for the base rate to increase.
For the foreseeable future, to increase the base rate would be economically foolhardy and damaging. In a period of weak growth, which Britain has had for the last two quarters, it is imperative to keep interest rates low.
Keynes, in The General Theory, stated:
There is always an alternative to the ownership of real capital-assets, namely the ownership of money and debts; so that the prospective yield with which the producers of new investment have to be content cannot fall below the standard set by the current rate of interest.
In other words, the ownership of debt sets a productivity standard above the rate of interest. If the productivity standard falls below the rate of interest, which may be artificially high, the venture fails – thus does confidence, consumption and investment.
Low interest rates make it easier for start-up enterprise to flourish. However, there is a risk that some investors will be put-off from investing due to the low return, as governed by the interest rate, and confidence and consumption falls due to that.
Does one increase rates, thus curtailing inflation and rewarding investors but starving growth, or does one keep rates low, so that growth occurs but inflation is left relatively unchecked?