News Column

Interest rates could be 5% in 10 years, warns Bank deputy

June 30, 2014

Staff and agencies

Interest rates could hit 5% within a decade, according to the outgoing Bank of England deputy governor for monetary policy.

Sir Charlie Bean said it would be "reasonable" to expect borrowing costs to return to pre-recession levels in the long term - between five and 10 years.

Homeowners have enjoyed a historically low 0.5% base rate for five years, but the low level of return has hit savers hard.

Bean told Sky News yesterday: "It might be reasonable to think that in that long term you would go back to 5%, but it's probably quite a long way down the road."

Last week, Mark Carney, the governor of the Bank of England, urged people to focus on the "big picture" rather than obsessing about when interest rates will start to rise. It followed accusations that he had been behaving like an "unreliable boyfriend" by hinting at a rise this year, before appearing to back-pedal.

Carney insisted that the important aspect for homeowners and businesses was that rates were likely to stabilise at around 2.5% in three years' time, rather than the historically "normal" level of 5%.

Bean, who leaves his job today, said market expectations that the first increase in interest rates would come at the turn of the year were "reasonable". He added: "The market has rates going up to 2.5% over next three years. That seems like a broadly sensible judgment."

He said that when interest rates do begin to rise the bank could, at the same time, start unwinding the pounds 375bn programme of buying British government bonds it undertook between 2009 and 2012. Bean admitted that in the run-up to the crash economists were "not sufficiently cognisant of the risks building up in the financial system", but he insisted the economy is more resilient than when he arrived at the central bank in 2000.

Meanwhile, the Bank for International Settlements warned that there are already worrying signs of unsustainable property prices and credit growth in some countries thanks to the policy of cheap money. The global forum for central banks said in its annual report: "Several early warning indicators signal that vulnerabilities have been building up in the financial systems of several countries."

While no early warning indicator is completely reliable, dismissing such readings as inappropriate would be too easy, it said.

Larry Elliott, page 24 =

Sir Charlie Bean, who leaves the Bank of England today, said expectations of a rate rise late this year were 'reasonable'

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Source: Guardian (UK)

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