Early in May as Mr Carney was preparing to take up his full duties as Governor of the Bank of England, the interest rate for the government to borrow 10 year money was just 1.6%. Yesterday the 10 year interest rate hit 2.7%, almost double the low point of September 2012.
We need to ask if this matters. After all, Mr Carney’s one major intervention in the monetary debate so far has been promise us the continuation of ultra low interest rates for the next three years, whilst unemployment comes down a bit and the economic recovery strengthens. Mr Carney actively sided with the borrowers against the savers in his statement, because he clearly thinks we need more borrowing to promote recovery.
Some might say the rise in government borrowing rates does not have any impact on individuals, families and private sector companies. After all, mortgage rates are still between 4.5% and 6%, as they were three months ago. Banks and Building Societies still offer a concessionary first couple of years at much lower rates. Savers can still pick up 1% for 1 year savings, and 2.5% for 3-4 year savings, levels well above the official 0.5% short term interest rate, as they could three months ago. As I have written before, Quantitative Easing and low Bank base rate were devices which have kept the cost of government borrowing artificially low, whilst creating a parallel private sector market in money and credit at higher rates.
However, Mr Carney would be wrong to simply ignore the markets. People in property are already talking about higher borrowing rates for new projects on the back of rising government rates. Savers canny enough to have cash will be able to buy into bonds or other financial assets at lower prices and on better income yields, whilst invested savers will lose on their current holdings. The government has been out of the main savings market for some time, refusing to issue National Savings products at the higher rates prevailing in the savings market when they can borrow so much more cheaply in the government bond market.
Mr Carney has three options from here. He could welcome the rising rates and help steer the whole market to more realistic rates for savers and borrowers. There is a bigger adjustment needed in the government market than in the private sector one. He could defy the markets, and state that when he said he wanted low interest rates to prevail he meant it. He will then have to initiate substantial new bond buying programmes to force the rates back down. Or he could largely ignore it, and take the line that he is relaxed about the cost of government borrowing going up all the time it does not hit the cost of private sector borrowing in ways which will derail his strategy.
I favour the first of these courses. I would couple it to more vigorous prosecution of the plans to break up and sort out RBS for the reasons often described here. We need competitive banking with more banks allied to rates of interest more subject to market selection. The ultra low government rates of quantitative easing have to end sometime. The quicker they are in mending the commercial banks, the quicker the special measures can be removed. It does need to be worthwhile to save. Many borrowers would like greater certainty more than a temporary period of ultra low rates followed by a rush upwards in rates.