Ross Clark

Britain’s borrowing binge - not Brexit - should be the big worry for the Bank of England

Britain's borrowing binge - not Brexit - should be the big worry for the Bank of England
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So, the Office of National Statistics has confirmed that the economy grew by 0.7 per cent in the last quarter of 2016, and by 1.8 per cent over the course of the year. Can we now please stop worrying about a post-Brexit recession and worry instead about an unsustainable consumer boom fed by interest rates which remain at panic levels.

The bad news this morning is that the UK saving ratio – which is an estimate of the percentage of their income which households are saving – has fallen sharply from 5.3 per cent to 3.3 per cent. That takes it lower than it was a decade ago, just before the financial crash, and indeed is the lowest level measured in half a century. As Helen Nugent wrote here yesterday,  consumers are piling on credit card debt at the fastest rate in a decade.

All of which begs the question: just why is the Bank of England holding down interest rates at 0.25 per cent? When they went down to 0.5 per cent in 2009 the Bank said it was an emergency measure, to deal with the deepest recession since the 1930s. In 2013, when the economy was growing strongly but rates had still not been lifted, the incoming governor Mark Carney suggested that rates would rise when the unemployment rate had fallen below 7 per cent (it was then 7.8 per cent). A year later, he abandoned that link and instead gave forward guidance that he expected rates to be around 2 per cent in three years’ time.

Well, here we are. Unemployment is now down to 5.4 per cent. CPI Inflation is at 2.3 per cent, above the government’s target of 2 per cent. The economy is growing at a healthy rate. House prices are rising by between 3 and 6 per cent, depending on what index you prefer. The pound has slumped, which might ordinarily lead to rates being increased to attract investors into sterling. And yet the Bank of England’s base rate, at 0.25 per cent, is now even lower than it was in the depth of the last recession in 2009.

So just what is the crisis which is keeping this ultra-loose monetary policy in place? It is hard to escape the conclusion that the bank’s Monetary Policy Committee simply cannot pull itself away from the idea that the vote for Brexit is going to lead to a deep economic crisis, in spite of rather obvious evidence that it isn’t happening. As for those Remainers who constant retort ‘but we haven’t yet left the EU’, many of the gloomy predictions made last year by the Bank of England, Treasury etc were based on the immediate aftermath of a vote for Brexit.

At this rate, Remainers will get their recession, eventually. It may even roughly coincide with the formal departure of Britain from the EU. But it won’t be the fault of Brexit; rather it will be a classic, good ‘ol British recession caused by the hangover of a borrowing binge which the Bank of England failed to keep under control.