The pundits had a great deal to say about the Bank of England keeping British base rates at 0.5%. Most other central banks are also keeping interest rates at a level so low as to be meaningless. The theory is that low interest rates encourage growth.
The theory may work on paper, but in the real world it remains just theory.
There is an increasing disconnection between the nominal rates set by banks and the rates actually being paid by customers. To be told that bank rates are low is an insult to small business customers who are commonly paying interest in double figures.
Many entrepreneurs are being forced to underwrite their businesses with credit cards – at a time when credit card rates are going through the roof.
Of course, there is a good economic reason for this: there is relatively little money available for loans at the moment, so it is only to be expected that the price of what money there is, the interest paid on it, should be high.
Fair enough. We cannot argue with the laws of supply and demand.
Banks remain in many people’s eyes as the bogeyman of the financial crisis and there are calls from some in the small business community that the banks should be “forced” to lend more. An increase in the amount of money being loaned should reduce the price of that money, the real interest rates being charged.
Yet is it right to “force” anyone to lend their money? Any loan should be based on a calm analysis of the business situation of both lender and borrower, and the loan should only be approved if it is likely to benefit both.