Re: The new normal is 2.5%, not 5% benchmark interest rate
“Why is that the case? Things have changed. Households have a lot of debt. The Government is consolidating its financial position. Europe is weak. The pound is strong. The financial system has been fundamentally changed – it has to carry a lot more capital, it has lot carry a lot more liquidity insurance and it will pass on those costs to borrowers. “As a consequence of all those factors, in order to bring the economy back to full employment, in order to get inflation at target, the new normal is materially lower than the old normal.”
Notice that Mark Carney does not offer a real reason that interest rates cannot rise to 5%, only that it would be inconvenient for borrowers and the ever hopeful “This time its different” theme. Therefore, it won’t happen. Really? Sometimes it is inconvenient for the tides to rise, so perhaps Mr. Carney could be named Governor of Tides and hold them back. His assumption, of course, is that interest rates are determine solely by central banks and that market forces are irrelevant. Patrick Barron
