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Matthew Lynn's London Eye Archives | Email alerts
March 7, 2012, 12:01 a.m. EST
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By Matthew Lynn
LONDON (MarketWatch) "” When the Bank of England announces its decision on interest rates on Thursday, nobody is exactly going to be sitting on the edge of their seat.
Predicting no change in interest rates is about as safe as predicting more wobbles in the Greek bond market.
In fact, waiting for the results of a Russian presidential election is about as exciting and uncertain as watching most major central banks these days.
This week's rates decision marks three years without any change in British interest rates. But it marks three years of something else as well "” and potentially more dangerous "” near-zero interest rates.
Stability has much to commend it, particularly in economics. It allows businesses to plan ahead, and it allows investors to predict what kind of returns they are going to get from different assets. There is nothing wrong with central banks keeping rates at the same level for a long time if that is what they believe the economy requires.
But free money? This is what the U.S., the U.K., Japan, and now the euro zone as well, effectively have. In truth, that is a dangerous experiment. And one that looks unlikely to end well.
It was on March 5, 2009, that the Bank of England slashed interest rates to 0.5%, and at the same time announced the start of its program of quantitative easing.
At the time, it was presented as an extraordinary, temporary response to the crisis. It was a one-off, massive stimulus to a post-credit crunch economy, which at the time was falling off a cliff. And yet here we are three years later, with rates still at those very low levels. There is very little sign of them going up any time soon. Indeed, the bank is adding another £50 billion to its QE program. And if it does anything this month, it is more likely to print more money than put rates up.
In fact, temporary measures have a way of becoming permanent. When Sir Robert Peel introduced an income tax in the U.K. in 1842, he presented that as a "temporary" measure as well. Needless to say, we're still waiting for it to be repealed.
There is clearly nothing very temporary about effectively zero interest rates any more.
We have become used to them "” both in the U.K., and in the U.S. (where rate were cut to just above zero in December 2008 and have stayed there ever since). But it is worth thinking about how odd this is. The Bank of England has been setting rates for three centuries without ever having pushed them as low as this before.
When something is temporary, people don't change their behavior. It takes time. If Israel launches a strike against Iran and the oil price doubles, for example, I probably won't go out and buy a smaller car to save on fuel costs. Not right away, anyway. I'll figure the price of oil will come down again soon, so it is not worth the trouble.
A wave of leveraged-buyout debt is beginning to crash down on Europe's shores, Dana Cimilluca reports on Markets Hub. Photo: Reuters.
But if I decide that the oil price has risen permanently, I will.
A basic rule of economics is that once you change the price of something, you change behavior as well. With money now virtually free, two things are happening.
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