Published on 2 Aug 2011

Britain the low interest ‘safe haven’, or growth laggard?

At approximately 1500 yesterday, Operation “Safe Haven” assured the safe passage of several thousand worried and weary bond traders into the Sterling gilt markets.

Indeed the rush of remuneration refugees happily drove down UK 10 year Government borrowing costs to their lowest levels for over 50 years.

This record low for the UK Treasury occurred on the very day that Spanish and Italian borrowing costs reached new record highs during the existence of the euro. It’s back to the borrowing costs of the peseta and lira days.

Mission accomplished, you might say. Certainly this development seems to underpin George Osborne‘s new communications mantra that Britain is a “safe haven in a storm”, that Britain is “stable”. To my occasionally cynical mind this seems to be a tacit admission that the Treasury recognises it has little to boast about so far as regards the economic numbers. The best that can be hoped for is stability. Stability is better than chaos. And if stability means austerity and that means low growth, than for the moment, so be it.

However, the metric by which “safe haven” success is being measured is severely flawed. Put simply there is little evidence that our record low in Government borrowing costs is much of a badge of honour, even as it is obviously better than Greek-style borrowing rates. The fall in those rates is much more to do with expectations of prolonged lows in Bank of England base rates well into 2012, driven by bad news about UK growth, than it is about a British safe haven. In fact, the National Institute of Economic and Social Research (NIESR) has shown why.

It has correlated these falls in Government borrowing costs with the behaviour of stock markets. Basically put, if the fall in the rates the Treasury pays was a consequence of optimism, you would expect to see it correlated with rises in the FTSE-100 (or 250 or All-Share). Between May 2010 and today this is absolutely not the case, as evidenced by today’s fall in bond rates at the same time as notable falls on stock markets.

As Jonathan Portes puts it: “We can conclude with a reasonable degree of confidence that the specific evidence cited by the Government to support its argument that its fiscal plans have improved market confidence in the UK shows nothing of the sort; if anything, the reverse. Low long-term interest rates appear to reflect economic weakness and lack of market confidence in the prospects of the UK economy, not the reverse”.

NIESR raise a further point. If low rates really were a result of safe haven flows, then you would expect sterling to strengthen. We absolutely have not seen that. If Osborne really did accomplish his now stated mission of creating a British “safe haven”, then logically expect the pound to appreciate, much as the Swiss Franc has done. And then start to worry about how exporters, manufacturers and the proclamations of a “rebalanced economy” will ever occur.

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11 reader comments

  1. Mucker says:

    so the high interest rates of Italy and Spain are because of their growing economies?

  2. Saltaire Sam says:

    Living with austerity is a comparative term. There is a great deal of difference between Osborne, Cameron, Clegg and their pals living with austerity (perhaps a couple fewer bottls of Dom Perignon) and someone on minimum wage.

    Osborne’s ‘get out of jail’ card – it was all labour’s fault – will keep him going for a few years yet, by which times it will be in the markets’ interests, having cleaned up on short selling, to see things improve, so they will manipulate things again.

    Do you think in years to come a descendant of Hart-Davies will front a TV programme called ‘What hedge funds did for us’?

    1. Andrew Dundas says:

      Hello Sam,
      Isn’t it also a bit of a stretch for anyone to claim Labour to have been responsible for creating the debt crises in Italy, USA and the EU periphery? And all at once!

  3. Philip Edwards says:


    Just shows you – hot money runs around the planet to any place it feels will hide it.

    Meanwhile, it will use economics jargon as a curtain against honest investigation.

    It won’t be able to run for ever, though. Sooner or later the perpetrators will make a bad mistake (see: Rupert Murdoch/Hosni Mubarak) and come face to face with a stiff challenge.

    What matters then is whether there are enough honest men in positions of power to tell the truth and make changes.

    It goes without saying the Tories, New Labour and the LibDems have no such strength. They are mere placemen, bought and paid for by the Establishment, scared of their own shadow and incapable of genuine morality.

  4. Barbara says:

    .2% growth in Greece would have produced euphoria in the Eurozone. In these difficult economic times surely our growth has resulted in the lower interest rates which must be beneficial to us .

    Of course we need higher growth but if the props are in place then hopefully it will occur. I am not an economist and the great economists[Keynes etc] of the past did not have to cope with the changes that globalism has caused.Let, alone the crisis in Europe and America] Perhaps we should be buying British when we can.Advise me please.

  5. Tina Carey says:


    This whole financial mess can sometimes for an ordinary working person such as myself be very hard to understand but your blog does go someway to making it more coherent. Thank you for that.

    The honest working person is being asked to pay for this huge mismanagement and at times total fraud that has taken place. People know this and what worries me is at what point does it become too much, what will the reaction be and how it will be dealt with by those in authority. Nobody concedes power easily.

  6. Sage Against the Machine says:

    Saltaire Sam and Philip Edwards – you are spot on with your comments.

    Of course, the current system isn’t growing – it’s started it’s inexorable collapse. Like any Ponzi or Pyramid scheme, our current debt-based money system needs new entrants to prop it up but they won’t invest without having confidence in it. And it’s a little difficult to convince the banks to lend to SMEs when they can make far more money at no risk on commodity speculation or by pocketing Merv the Swerve’s 200bn QE charity donation. Forget Freidman, Mises, Hayek and Keynes. There is only one economic guru I listen to now – it’s Gok Wan – “it’s all about the confidence!”

  7. Sage Against the Machine says:

    Barbara wrote: surely our growth has resulted in the lower interest rates which must be beneficial to us .

    Who is it beneficial to? Savers & pensioners? I think not. It’s beneficial to a small number of home owners who happen to be on a tracker product and it’s beneficial to the banks because they can borrow at 0.75% LIBOR and sell to government via bonds at 3%. Easy money.

    Barbara also wrote: Of course we need higher growth

    Only with our current debt-based money system. A rich developed nation like ours doesn’t need “growth” because it’s a quantitative measure not qualitative. After a certain point, when a human experiences growth it’s usually a cancerous tumour.

  8. Barbara says:

    Sage Against the Machine, Growth can be qualitative.Updating oldfashioned outdated procedures and time wasting uneconomic policies is most definitely qualitative.

    Changing targets to behavioural objectives is one way of making growth qualitative.
    eg Be able to empty all wheelie bins on a street without leaving any rubbish on the road within the specified time.
    [This is not a put down to rubbish collectors. Where I live the service is excellent but that has not always been my experience.}

    Behavioural objectives rather than targets or expectations define performance with parameters of desired methologies and outcomes with behavioural[ ie qualitative]outcomes built into the expectations.

  9. Sage Against the Machine says:

    Barbara – for the first time I don’t disagree with you. But the point is that government are only interested in the hard numbers, so the genuine growth you are describing gets lost in all the clutter of information. Government bases all of its major economic decisions on that GDP number (which hides a multitude of sins like crime, ill-health, unproductive work, marital breakdown – and these all add to GDP).

  10. Barbara says:

    One point Sage that really is a put down!

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