There have been periods in the past in which the Bank of England has left interest rates unchanged for a long time. In 1719, official borrowing costs were raised from 4% to 5%, where they remained during the South Sea bubble, the seven years’ war, the loss of the American colonies, the French Revolution and the Napoleonic wars. In 1822, Seven years after the Battle of Waterloo, the Bank decided it was again time to act and reduced rates to their level of 103 years earlier.

By comparison with their 18th and early 19th century forbears, the current crop of policymakers in Threadneedle Street are positively hasty. Rates were cut to 0.5% in March 2009 and left there for a mere seven-and-a-half years. A year ago, in the aftermath of the Brexit vote, they were reduced to 0.25%. And there they are likely to stay.

When the Bank’s monetary policy committee last met, three of the eight members said the post-referendum stimulus had done its work, making it possible to push rates back up to 0.5%. That caused a flurry of speculation that this week’s MPC meeting would result in the first rate rise in more than a decade. It would be wise not to bet your mortgage on it.



The case for an increase was never all that strong and is weaker than when the MPC last met in June. Growth has been sluggish in the first half of the year, running at an annualised rate of 1%. While above its 2% target, inflation unexpectedly fell in June to 2.6% and looks to be close to a peak. There are few signs that workers have been able to use the erosion of their living standards caused by the fall in the value of the pound to negotiate higher pay awards.

Those advocating a rate rise say the Bank needs to give itself some room for manoeuvre in the event of there being another recession. The logic of this is not immediately obvious. Raising interest rates when the economy is struggling and consumer debt has been rising rapidly would risk triggering the recession the Bank is keen to avoid. Borrowing costs would go up only to come down again.

It is the same story around the developed world. Central banks are uncomfortable with interest rates at historically low levels. They would like to sell back to the financial markets the bonds they bought in their quantitative easing programmes. But that’s easier said than done. Only in the US have interest rates been increased, and even there, the Federal Reserve is moving at a snail’s pace. The European Central Bank is not remotely close to tightening policy, nor is the Bank of Japan.



Hope springs eternal. Since the financial crisis broke 10 years ago, policymakers have viewed the disruption as a temporary phenomenon. Growth would pick up. Productivity would rise. Inflationary pressure would increase. Interest rates would return to more normal levels.

It hasn’t happened. The first convulsions in the financial markets occurred on 9 August 2007 and a decade on, it is getting ever harder to see the crisis as a temporary phenomenon. Instead, the period before the crash now looks like the modern equivalent of the Edwardian summer before the outbreak of the first world war.

The economic historian Angus Madison has produced figures for growth per head of population for western countries going back centuries. In the UK, GDP per head growth averaged 1.26% a year between 1820 and 1870, decelerated to 1.01% a year from 1870 to 1913, and then fell again to 0.92% in the period from 1913 to 1950 that included two world wars and the Great Depression. There was then a marked improvement to 2.44% a year in the period from 1950 to 1973, followed by a fresh decline to 1.79% in the quarter century from 1973 to 1998.

Since the economy last peaked in early 2008, growth in GDP per head has averaged about 0.2% a year, in line with the performance of the economy between 1500 and 1820.

The underlying performance of the UK economy is probably not quite as bad as that, but the trend has been poor enough for long enough to consider whether the really strong growth in the period after the second world war was the exception.

There is plenty of supporting evidence for this notion. Economic growth in the G7 has been declining since the 1960s. The Organisation for Economic Co-operation and Development estimates that potential per capita growth among its 34 rich-country members is 1% a year. The American economist Robert Gordon said only in one relatively brief period – 1996 to 2004 – has US productivity matched the growth rates of the golden age after the second world war, and that was when IT transformed office work.

By 2000, Gordon said, every office was equipped with web-linked personal computers that could do not just word processing, but download all sorts of information and perform calculations at high speed. By 2005, the transition to the modern office was complete with the arrival of flatscreens, but then the progress stopped. As in the UK, US productivity growth since the financial crisis has been slow.

There will be profound implications if, and it remains an if, this is the new normal. For a start, growth oscillating around a 1% trend will result in more recessions. Inflationary pressure will be weak and deflationary episodes will be common. In the 19th century, there was no assumption that the cost of living would rise year in and year out: indeed, the price level was lower in 1914 than it had been in 1815.



Weaker growth, in itself, would not necessarily be a bad thing. It might actually be a good thing if it meant less systematic damage being caused to the environment. Living standards in the developed world are already high, so does it really matter if they are increasing at 1% a year rather than 2% a year?

The answer to that question depends on how the fruits of that growth are distributed. If they are apportioned so the neediest benefit the most, this would be one thing. If they go disproportionately to the 1%, while the other 99% have to accept flat living standards and deteriorating public services, this would create conditions ripe for social and political upheaval.

Central banks have provided unprecedented amounts of stimulus in the past decade, but the payoff has been poor. That alone should raise serious doubts about whether there will ever be a return to the days when living standards doubled in a quarter of a century. Instead, we need to be prepared for a world in which there will be a bitter struggle over the meagre spoils of growth.

