The era of low interest rates is coming to an end – its legacy is inequality and toxic politics | William Davies


On Thursday noon, the Bank of England’s monetary policy committee will announce an interest rate hike. Some City analysts predicted the announcement would raise the rate by 0.75 percentage points (mimicking that of the European Central Bank in early September) to a total of 2.5%. An upward jump of this magnitude has not happened since the Bank became independent in 1997. And the last time interest rates rose by more than half a percentage point in either direction , this was at the height of the 2008 banking crisis, when they were reduced. quickly in order to support the flow of credit.

Even if, as other observers expect, the announcement is limited to a 0.5 percentage point hike, it will be one more step on a staircase that should reach at least 4% by the start. next year. Regardless of the pace, these increases mark the conclusion of one of the most extraordinary experiments in economic policy in modern history. The architects of this era – characterized by exceptionally low interest rates – were unelected technocrats rather than politicians, and yet they leave a deep political and economic legacy of spiraling inequality, channeled above all through the ownership of housing.

In the 314 years between the founding of the Bank of England and the 2008 crisis, interest rates had never fallen below 2%. But for most of the past 14 years, they have been below 1%. Throughout David Cameron’s time in Downing Street, interest rates were stuck at the previously unthinkable level of 0.5%. When disruption hit in the form of the Brexit vote, it was further reduced. When an even bigger shock hit in the form of international lockdowns, they were further reduced, down to 0.1%. Added to this was the asset purchase program (quantitative easing), which further lowered effective interest rates and which is only gradually unwinding.

The reasons for these exceptional decisions were clear. The financial system seized up between 2007 and 2009, with banks becoming reluctant to lend to each other. Cheap money was injected like a blood transfusion to stabilize the system. George Osborne’s austerity measures, which falsely blamed Britain’s economic woes on public debt, resulted in economic stagnation so severe that only unprecedented monetary policies could stave off a depression. With the government’s refusal to stimulate the economy through fiscal policy and inflation well below the Bank’s 2% target, the task of growing the economy fell to monetary policymakers, whose only tool was to create more and more cheap money, and whose only point of intervention was high finance. None of this was intended to channel money to areas of greatest social need, and it did nothing to help those who depended on unsecured borrowing through credit cards or payday loans.

What about the social and political heritage of this now bygone era? It was, of course, a time of rapid property price inflation, fueled by the ultra-cheap mortgages on offer. This in itself was not unprecedented: house prices also skyrocketed during the Blair era (up 25% in 2002 alone), a time when interest rates were at historically normal levels. .

The difference with the post-2009 regime was, first, that access to all that cheap credit was drastically restricted by regulators, to prevent riskier lending. This produced the spectacle of “safe” borrowers being able to access incalculable financial opportunities, while others were excluded. This meant a massive potential outlay of credit for owners of existing assets, including existing owners.

In 2016, rental properties accounted for 20% of all mortgages by value. Homeowners who had already built up a comfortable cushion of capital had the luxury of refinancing at ultra-low cost (often paying much less for housing than renters), with many becoming cash-rich when equity was withdrawn. Thousands of middle-class loft, car, luxury bathroom and vacation conversions over the past 13 years are ultimately side effects of the Bank of England’s efforts to stimulate the financial system. In 2021, a record £4.3 billion was released by UK owners.

Second, stagnating wages after 2008 meant that (except for those working in financial and business services) opportunities to join this the propertied class moving up the housing ladder became increasingly dependent on family gifts and inheritances. One of the many dysfunctional legacies of the 2009-2022 period is extreme intergenerational inequality in wealth and space, such that those over 65 now own 47% of home equity and 7.4 million “additional” rooms. Many rental property owners have come to view rental property as their main pension, or even as guaranteed income for their own children.

The intergenerational politics resulting from this toxic settlement has been well documented by the likes of Chloe Timperley and Keir Milburn, and manifests itself clearly in voting behavior. It’s well known that older voters are more likely to vote Conservative and to have voted Leave in 2016, but less often noted is that these voters are also much more likely to be homeowners.

But it has also produced an unpleasant form of economic progress, which breeds paranoia and resentment for all. Every time the UK economy has struggled over the past 14 years, things have gotten even better for asset owners. As money was drained from local government by Osborne, trade froze due to Brexit, and workplaces and pubs were closed due to Covid, more cheap money was put in disposal and prices of real estate (and other assets) have risen further. No money for a new public swimming pool; a lot for a new freestanding bathtub. Margaret Thatcher’s famous phrase “There is no society. There are individual men and women and there are families” moved from dogma to everyday reality.

For those who managed to lock in their interest rates before August, the exclusive party will continue for a few more years. But symbolically and politically it is over. What will follow? Liz Truss and Kwasi Kwarteng have made it clear that they have no egalitarian sympathy, and the unprecedented tax expenditure of capping household energy bills will be deeply regressive. House prices are expected to fall in 2023, but wages are already falling at their fastest pace on record. None of this looks good and will surely cost Truss votes.

Rising interest rates right now will make things worse for millions of people and will do nothing to bring down prices that are high for geopolitical reasons, like the war in Ukraine. But looking back to that unique and strange time after 2009, we should be clear that cheap credit – for some – was never a sufficient answer to Britain’s economic problems, and see it as such. has been the cause of many social injustices, status anxieties and anger in recent times.


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