press release
10 February 2016
Why investors should raise a cheer to the Bank of England’s 70th anniversary of nationalisation As the Bank of England marks 70 years in public ownership on 14 February 2016, Richard Stone, Chief Executive of The Share Centre assesses its role in managing the UK’s monetary policy.
While the Bank of England – the old lady of Threadneedle Street – is over 300 years old, it has only spent the last 70 as a publicly-owned institution. It was privately owned by its stockholders until it was nationalised in 1946 by the post-war Labour government under Clement Atlee.
Since then it has presided over wildly varying fortunes in the UK economy, from record inflation levels in the 1970s to today’s era of historically low interest rates.
Base rates fell to 0.5% in March 2009 and have now therefore been at that constant level for nearly seven years. Richard Stone, Chief Executive of The Share Centre, says this period of stable economic conditions is good for personal investors and for the UK economy as a whole – and that much of it has to do with the independence granted to the Bank in 1998.
Richard Stone, Chief Executive of The Share Centre commented: “The Bank of England has a long and proud history stretching back over 300 years. The last 70 of those have been in national ownership – and more recently as an independent public body.
“Throughout, the Bank has had to have an eye on the money supply, inflation and interest rates. Free from political interference that mandate has been strengthened since independence in 1998 and the inflation track record shows the success the Bank has had
since then. Indeed, we are currently in a period of historically flat and low interest rates and low inflation.”
The confidence that economic stability has given to investors is reflected in a recent survey The Share Centre has carried out of its customers. While over a third believe we will not see another rate rise until the second quarter of 2017, a massive 86% say they are not concerned by the prospect of rates going up.
Richard Stone added: “The Share Centre recently conducted a survey to which over 2,000 of our personal investor customers responded. More than 1 in 3 (36%) believe the next interest rate rise will not happen until at least the second quarter of 2017, with a massive 86% unconcerned about a rise in UK rates given the Federal Reserve’s recent increase to the US base rate.
“Personal investors should welcome stable economic conditions, low inflation and low interest rates and should therefore raise a cheer to the Bank of England’s 70 year anniversary in national ownership and wish it a continued long and successful future managing the UK’s monetary policy.”
THE BANK SINCE NATIONALISATION – A POTTED HISTORY
At the time of nationalization the economic policy of the day was focused on a Keynesian approach. Since then the bank has seen government policy move to a more monetarist approach. Throughout, the bank has stood ready to intervene and support the UK economy administering the issuing of money and implementation, and more recently setting, of interest rates.
The Bank of England’s main task is to manage the money supply and the cost of money (the base rate) within the UK. Base rates fell to 0.5% in March 2009 and have now therefore been at that constant level for nearly seven years. This is historic in the context of the Bank’s 400 plus years of existence as well as in the context of the last 70 years since nationalization.
The last time rates remained unchanged for such a long period was during the Second World War Rates were cut to 2% in 1939 and did not increase again until 1951 when they
moved to 2.5%. That 12 year period of constant rates was a record in the Bank’s history as is the currently rate of 0.5% which had never been seen before 2009.
The main purpose of changing interest rates is to help control prices – inflation.
In the Bank’s history since nationalization in 1946 the record on inflation has been somewhat mixed. Based on the retail price index (RPI), the average rate since 1946 has been 5.5% per annum. Since independence was granted to the Bank in 1998 the target has been 2% - significantly below that post-war average. Since 1998 the average RPI has been 2.8%, perhaps indicating the Bank of England’s independence has been successful in delivering lower inflation and lower interest rates. RPI inflation peaked at 24% in 1975 and fell as low as minus 0.5% in 2009 following the financial crisis.
Investors in the stockmarket should generally welcome low interest rates and stable benign economic conditions – i.e. low inflation. Such conditions should allow companies to prosper and grow and make the returns on equity investment appear attractive as compared to cash.
The stockmarket has performed strongly since the Bank was nationalized. The FT30 Index of the top 30 companies listed on the London market was launched at a base value of 100 in 1935. Having fallen during the Second World War it recovered and stood a little above that base level in 1946. By 1998 when the Bank was granted independence the index stood at over 3,000 and today is still above 2,600 – i.e. 26 times its level in 1935.
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