Money has been easy for the UK public sector. The 0.5% interest rate is the one that applies only to government. Government has enjoyed using it to the full, borrowing collosal sums on the back of it.
Money has been much tighter in the non bank private sector. Effective interest rates for borrowers have been 5% or more, more than ten times base rate. Savers have suffered from the low official rates, but even they now enjoy a multiple of 0.5% for savings plans of 1 – 5 years.
The main reason money is still so tight for the private sector is the Regulator’s demands that the commercial banks continue to strengthen their balance sheets. The large profits the banks can make out of low official rates for themselves and the government, and the much higher lending rates, helps. Their super profits are the result of the favourable monetary conditions fopr banks, designed to boost their retained profits and so their balance sheets. It still leaves a lot more to do. That encourages the banks to lend less or to limit the growth in their lending. It is easier to lend less to improve their ratio between the amount of capital and the amount they lend, than to raise new capital.
Because lending is effectively rationed by regulatory orders, it is easier for the banks to lend more money to large companies, low risk individuals and corporates, and the government itself, than to lend to riskier and smaller ventures. The large loan books in London for the corporates and the financial sector are easier to administer than the large numbers of small loans in provincial UK.
This is the essential background to the budget. Getting the banks right is far more important than the small government schemes Ministers like to dream up for particular areas, sectors or themes. A few hundred million for Enterprise Zones, and a couple of billion for a Green Investment bank are small in relation to a £1.5 trillion economy.
The danger now is that growth could start to slow later this year or into next. Emerging market economies are being forced to slow down to curb inflation. The US monetary stimulus expires in June. Euroland is struggling to grow outside Germany and is already talking of monetary tightening. The oil price hike will reduce demand around the world as energy takes a higher proportion of the consumer economy incomes. If oil prices stay high because oil production is cut, all are losers.
The government is waiting for the Vickers Report into the banks. Much is now riding on that piece of work, and on the government’s response to it. Only by mobilising the banks for sensible levels of money and credit to go into the private sector can the economy hope to make faster progress. Meanwhile, it would be good if the government got on with making a major building programme in the energy sector possible, as we are going to need more domestic enegry soon.