Is the UK too reliant on interest rate cuts to boost growth? CHARLES BLANCO-THOMSON

Charles White-Thomson, former CEO of Saxo UK, examines how Britain became addicted to cheap loans and financing.

I was once asked the question in a live interview: Is the UK addicted to cheap money?

Alarm bells were ringing in my head as I considered the potential pitfall of comparing the UK to addiction. I dodged the question and replied that I thought we depended on cheap money.

Today I would answer this question differently: the answer would be yes.

Years of money almost given away, a process fueled by rock-bottom interest rates just above 0 percent, has made our politicians and borrowers fond of high levels of borrowing and cheap financing.

I eat a lot of things that taste or feel good, and once you’ve experienced them, you want more and everything else seems a little dull or boring.

The same goes for cheap money: it’s instant, short-lived pleasure, rather than thoughtful, long-term decision-making.

I believe interest rate cuts are the unwritten core of the UK’s currently uninspiring growth plan.

In the absence of flashy or bold growth initiatives to unlock the UK’s financial straitjacket, the strategy appears to be to wait for lower rates to unleash animal spirits and get the economy and consumers really going again.

It plays with the psyche and characters of both Hunt and Reeves, who compete for the title of Captain Sensible, or safe custodians of the economy, prioritizing the status quo with small flourishes over a big, bold growth plan that involves risk. considered.

Reeves will not want to cause trouble and snatch defeat from the jaws of electoral victory, if the polls are accurate.

Hunt won’t want to tarnish his “safe hands persona” with some higher risk policies. We should expect more of the same as we get closer to the election.

I still believe that Captain Sensible’s strategy will not succeed. In fact, it will limit us to a survival economy.

This financial situation will add to the national anxiety, where choices and options are limited, and will impact much of the population who are also barely scraping by.

We should break this stranglehold and grow revenue driven by a direct growth plan with considered risk taking.

It is also important not to be lulled into a false sense of security by February’s GDP figures, which saw the UK grow by 0.1 per cent.

The comments around this were revealing: a celebration that we have emerged from a shallow recession; Extend the pennant for 0.1 percent growth!

While a small positive step in our return to growth is a good thing, we should not fool ourselves. Our growth is anemic and celebrating it demonstrates a fundamental lack of ambition.

This lack of growth has been a problem for the past 16 years: GDP per capita has grown at a slow 0.3 percent annually between 2007 and 2023.

It’s worth noting that 16 years of anemic growth is a long time even if placed in historical context.

XAI Asset Management has concluded that we must go back to the early 20th century and the horrors of World War I to find a longer period of consecutive years of limited or no growth.

Moving the interest rate lever can also be a double-edged sword. I think the aggressively low interest rates we experienced recently did not serve the majority well.

The initial motive was to avoid a sharp recession, but rates were kept too low for too long.

It drove up asset prices, inflated aggressively, spurred bubbles, and hit productivity as projects were taken on because they were cheap to finance versus whether they were actually viable, to name a few of the problems.

It also gave a generation an unrealistic view of their “credit quality” and the rates at which they could borrow. If you bought physical assets and had the funds to reduce debt quickly, you would have taken advantage of this wave.

For the rest, cheap debt became expensive, inflation soared, interest rates soared in response, and physical asset prices generally remained high.

This mix of financial volatility and uncertainty has consequences that include difficulty moving up the housing market and a declining birth rate as having children becomes too expensive.

It’s also interesting to see the pressure being applied to the Bank of England: industry insiders say that if rates are not cut by mid-year, the economy and consumers will suffer dramatically.

The Bank values ​​its independence and is unlikely to respond to this type of pressure.

It aims to ensure that inflation has been hit on the head, as a resurgence during a rate cut scenario would be damaging and could well trigger a sudden rate hike.

The United States is experiencing the same dilemma surrounding the debate over rate cuts in the face of an enviably strong GDP outlook: Wells Fargo recently raised its 2024 US GDP target to 2.5 percent.

What does good look like? As with many things, it’s all about balance.

Sustained growth is led by a growth plan in which we double down on the strengths of the economy, manage our spending more efficiently, and do not craft a plan that relies solely on cheap money or aggressive rate cuts.

Rate cuts are welcome, but this is secondary and may take longer to occur than currently anticipated.

We learn to stand on our own two feet, driven by our growth plan rather than overstimulating the economy and consumers and the resulting hangover when rates rise.

This will create a more balanced and stronger UK and deliver sustainable returns, today and for generations to come.

As I write, the parable of the sower comes to mind. This strategy is about the seed that falls on good soil and grows thirty, sixty and a hundredfold. Not from the seed that falls on rocky ground, with little soil and shallow roots, immediately sprouted and when the sun rose it burned and withered.

There is much to be excited about as we fantasize about the UK realizing our enormous potential, creating our own luck and improving our options rather than wallowing in negativity and decline.

Going back to Matthew 13: ‘he who has ears, let him hear.’