Ex-Bank governor: ‘Fool’s paradise’ is over – now we must let rates rise

Sage: Ex-Bank of England governor Mervyn King

Households have been living in a ‘fool’s paradise’ because they have mistakenly assumed low interest rates would last forever, former Bank of England chief Mervyn King said this weekend.

Lord King warned rates are returning to ‘normal levels’. 

But he insisted the economy will benefit from the change and that central banks ‘should not try to stand in the way’. 

The veteran of the financial crisis was governor of the Bank of England for a decade until 2013. His opinions are still highly regarded and often shape public discourse. 

The benchmark rate, which is set by the Bank and began the year at 0.25 per cent, rose by 0.5 percentage points to 2.25 per cent last month as inflation soared. 

There are two further rates decisions before Christmas and markets have already pencilled in an increase to as much as 6 per cent next year. 

That has sent mortgage costs rocketing. The average two-year fixed deal reached 6.47 per cent on Friday – the highest since the financial crisis in 2008 – while the average five-year deal was 6.29 per cent. 

Lord King said: ‘We have been in a fool’s paradise where people seem to believe we could have very low interest rates indefinitely.’ 

‘The adjustment has to take place one way or another and central banks cannot afford to back off on the grounds that, ‘Gosh, assets are falling, this is a terrible surprise.’ 

Speaking to the Australian Weekend newspaper, he said the recent volatility which has rocked pension funds was ‘an inevitable consequence of a return to more normal levels of interest rates, which ought to be very welcome. Central banks should not try to stand in the way. 

‘The repricing is going to have significant impacts on portfolios of many investors, including the pension funds that we have seen struggle in London. These pension funds are now being caught out.’ 

The Bank of England launched an emergency £65billion bond-buying programme to bail out funds that had been relying too heavily on complex financial products – liability driven investments, or LDIs. 

‘There will be quite a debate as to why the pension funds were allowed to borrow a great deal through embedded leverage in derivative transactions,’ he said. 

Households are struggling with a cost of living crisis and energy and food bills rise. 

More than five million families could see annual mortgage payments increase by £5,100 by the end of 2024, according to a report last week. 

Former Chancellor Kwasi Kwarteng’s botched mini-Budget, which prompted the Bank of England’s action, sparked market volatility that pushed up the cost of Government borrowing and spurred the increase in mortgage rates.

This post first appeared on Dailymail.co.uk