How five years of rock-bottom interest rates have changed Britain

How five years of rock-bottom interest rates have changed Britain

Five years ago on Wednesday, the Bank of England slashed interest rates to a record low of 0.5% – and it’s still there. For some it’s been goods news, for others bad

by Patrick CollinsonLarry ElliottSean FarrellPhillip Inman and Hilary Osborne

The Observer, Sunday 2 March 2014

Five years ago this week, on 5 March 2009, the Bank of England took the dramatic step of cutting interest rates to their lowest level in more 300 years. The previous 18 months had seen Northern Rock nationalised, RBS, Lloyds and HBOS rescued by massive taxpayer bailouts and Lehman Brothers collapse in the United States. House prices were falling, car sales plunging and Britain found itself facing a deep depression.

For a decade before the crisis the Bank had dealt in finely tuned adjustments, usually amounting to a scrupulously judged quarter point cut or rise. But in 2008 everything changed and it took just five months to slash the base rate from 5% down to 0.5%. And there it has stayed, with rate-setting committee member David Miles last week suggesting 5% would not be seen again for years, perhaps never.

Homeowners and businesses have undoubtedly been saved from repossession or administration, but savers have watched their savings growth dwindle to almost nothing as the UK adjusts to an era of low rates.

These are the effects on both winners and losers.

Mortgage payers

Homeowners with mortgages have been the big beneficiaries of record low rates, especially those lucky or canny enough to have had mortgage deals tied to the base rate as it plummeted. Many of those mega-deals have since ended, but there are still borrowers sitting on cheap standard variable rates and enjoying monthly repayments much lower than they signed up for. Six years ago, before the crunch, the average SVR stood at 7.24%; it is now 4.39%, with some paying as little as 2.5%. Even someone staying on an average SVR, with a £100,000 interest-only mortgage, will have saved a total of £13,300 over the past five years.

There will be many who without the rate cuts would not have been able to hold on to their homes at all. In the previous housing crash in 1991 there were 75,000 repossessions in a year, but this time the number hit only 50,000 in 2009, according to the Council of Mortgage Lenders, and quickly fell back. Last year there were 29,000, despite the squeeze on household incomes.

“We have had a recession and several years in which real earnings have not increased – things that are usually associated with a rise in arrears and repossessions,” said Matthew Pointon, property economist at Capital Economics. “There’s no doubt the low base rate has helped keep these down.” As well as allowing people to keep up with mortgage payments, it had also effectively made it cheaper for lenders to exercise forbearance, he said.

Mortgages have been paid off more quickly, with the Bank of England’s reporting that repayments have exceeded the withdrawal of equity by more than £10bn in every quarter since the summer of 2010. However, there is little evidence that people have been taking the chance to overpay and make inroads into their borrowing. With food and energy bills going up, some may have simply diverted any savings into paying for something else. Hilary Osborne


Britain’s army of small savers, who outnumber mortgage holders by seven to one, have lost out on around £65bn in interest payments since the Bank of England slashed rates, according to consultants McKinsey.Save our Savers, a campaign group borne out of the financial crisis, reckons that the figure is even higher: “We calculate that savers have lost around £250bn through a combination of lower interest rates and above-target inflation.”

But it is a peculiarity of the financial crisis that the lower interest rates have fallen, the more we have saved. In the dying days of the boom in early 2008, UK households were saving just 0.2% of their total income every month. But as the banks toppled and worries about job losses mounted, the savings ratio leapt to 8% within a year. It’s a sign of renewed confidence that the figure is now falling again.

Throughout the crisis, British savers have sought safety first, preferring instant access accounts even at the cost of near-invisible rates of interest. The Bank of England reckons that rates have been so poor that savers have decided to keep their money in easy reach rather than locked away into accounts that pay little extra. Over the past two years alone, the amount kept in instant-access accounts has risen from £435bn to £525bn, while the amount in savings bonds has dropped from £281bn to £238bn. Money has also poured into cash Isas – up from £162bn five years ago to £227bn now.

In the early days of the crisis, banks desperate for cash kept interest rates relatively high despite base rate falling to 0.5%. The real pain for savers came when the government introduced Funding for Lending in July 2012, which gave banks access to cash and made them much less keen to offer competitive rates, said Anna Bowes Since then, rates on “best buy” instant access savings accounts have more than halved – and there’s little sign of any respite for savers soon. Patrick Collinson


The era of ultra-low interest rates has saved thousands of businesses and allowed many that would otherwise have gone to the wall to dust themselves down and repay their debts – but it hasn’t made it easy for them to get a loan to expand.

Comparisons are hard to make with the early 1990s recession when bankruptcies quadrupled to 32,000, because 10 years ago the Labour government made it much easier to declare insolvency. But the figures show a continuing, gentle rise from 2004 without a 1990s-style jump after 2008.

Five years on from the crash, corporate profits are up, borrowings are down and official figures for the last three months of 2013 show businesses are investing again. The 0.5% interest rate and injection of £375bn into the financial system have also proved an essential support for consumer confidence. The downturn has seen a squeeze on incomes, but low rates have helped to prop up spending on the high street during tough times by freeing up consumer cash with lowermortgage rates.

But the combined efforts of the Bank and Treasury to increase lending to the corporate sector have failed.

Businesses that need cash to invest in new plant and machinery have found that charges levied by their banks remain high and come with stiff demands for collateral. Even with economic recovery taking hold, a small business owner with a sound business plan who wants a loan can still be asked to put his or her house up as security. Phillip Inman


Critics of the banks argue that they have been the chief beneficiaries of low interest rates because they can borrow money cheaply to lend out at a profit. But the picture is not that simple.

Banks can borrow for very short periods from the Bank of England, but get the vast majority of their funding from retail deposits or the money markets. “Bank rate”, though it is used to price many loans, does not determine the rate at which banks can borrow.

Ian Gordon, banks analyst at Investec, said low interest rates have been bad for banks’ day-to-day business because they squeezed the margin between borrowing and lending: “The bad news, most notably for liability [deposit]-heavy banks like HSBC and Standard Chartered, but also others including RBS, has been a marked impact on deposit spreads.”

Building societies have been hit harder because many mortgage borrowers are on standard variable rates that are at rock-bottom.

Simon Ward, an economist at Henderson Global Investors, argues that lower rates were needed but that they went too low for too long: “If anything, low rates have hurt banks’ profitability and delayed the recovery because the banks needed to rebuild their balance sheets [from profits] before they could lend again.”

But matters could have been much worse. The Bank of England’s view is that low rates were essential to prevent an economic meltdown and huge defaults by households and business borrowers. At his first big speech as Bank governor last year, Mark Carney said that many business loans were linked to the base rate and, until the recovery is in full swing ,rates should remain low. Sean Farrell


Britain has form when it comes to low interest rates. It is now five years since Threadneedle Street’s monetary policy committee cut the cost of borrowing to 0.5% – the lowest it had been since the Bank of England was founded in 1694.

But Mark Carney and his eight colleagues have a long way to go before they can beat the period between 1932 and 1951 – which straddled the Jarrow march, the abdication of Edward VIII, the second world war and the founding of the NHS – when bank rate remained remarkably fixed.

Interest rates stayed at 2% for 19 years, apart from a brief increase to 4% as a confidence-raising measure on the outbreak of the war. But by October 1939, bank rate was back to 2%, where it remained until Clement Attlee was replaced by Sir Winston Churchill as prime minister in the autumn of 1951.

As today, the long period of low interest rates was seen as the antidote to a deep and prolonged slump. As now, the impact was felt in the housing market, although in the 1930s cheap money led to a building boom that spawned the classic suburban semi, rather than to rising property prices.

But in the modern era, bank rate has tended to be a lot higher. The post-war peak came in late 1979, when the monetarist policies pursued by Margaret Thatcher’s government resulted in official interest rates being raised to 17%. On Black Wednesday – 16 September 1992 – when George Soros and other speculators drove the UK out of the European exchange rate mechanism, the government’s vain rearguard action involved an increase from 10% to 12% in the morning, and in the afternoon a pledge to raise them again to 15%.

By the time Gordon Brown granted the Bank independence in 1997, bank rate, at 6.25%, was back to levels seen when the Bank was created. The “new normal” in what Mervyn King called the NICE decade (non-inflationary continual expansion) was for official rates to fluctuate from 7.5% at the top to 3.75% at the bottom. Rates tended to be moved incrementally, by 0.25 percentage points at a time.

That was then. The new “new normal” since the collapse of Lehman Brothers in September 2008 has been for the Bank to provide an unprecedented amount of stimulus, not only through bank rate but through buying £375bn of government bonds and by special schemes to encourage credit growth such as Funding for Lending.

The City expects the sixth anniversary of the 0.5% rate to pass before the Bank starts raising rates, and that they will peak at 2.5%-3%. Carney has certainly signalled that he wants them to remain at 0.5% for the foreseeable future.

Those two decades of stability in the 20th century have nothing, however, on the country’s record period of unchanged rates. In 1719, the Bank raised rates from 4% to 5%. In 1822 it had second thoughts, and brought them back down to 4% again.

Larry Elliott


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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