Low base rate having dangerous side effects

It has been claimed recently that the ultra-low base interest rate in the UK is resulting in dangerous side effects that will make it necessary to increase the base rate sooner rather than later. The base rate has been at just 0.5 percent since March of last year, and this is the lowest it has even been in the history of the Bank of England, which spans over three centuries.

The warning has come from the Bank of International Settlements, and officials from the BIS said that the effects that these mega-low rates are having could seriously affect the recovery of the economy. The BIS has said that policymakers and the MPC now need to seriously consider increasing the base rate from its all time low.

The BIS said that the government should now steer clear of printing money, which is effectively what it has been doing through its quantitative easing programme, and should avoid the massive public spending programmes to ensure that a fresh financial crisis was not started. The warnings form part of a recent report that has been put together by the BIS.

It is not only the Bank of England that will be affected by the recommendations that have been made by the BIS, but also other central banks such as the US Federal Reserve and the European Central Bank. They all slashed the base rate during the economic and financial crisis but are now being warned to consider an increase.

In its annual report the BIS wrote: ‘The time has come to ask when and how these powerful measures can be phased out. We cannot ignore the fact that the cumulating side-effects themselves pose a danger that, at the very least, implies exiting sooner than may be comfortable for many.’