Markets expect the Bank of England to start raising rates from early next year. In 3 years Bank Rate is expected to be 1.5%. While possible, it is not inevitable. We’ve seen these sorts of expectations dashed before. In the following slides, Marcus Wright sets out the economic case for ‘lower for longer’ interest rates in the UK. ‘Lower for longer’ doesn’t necessarily mean interest rates cannot go up. It can also mean central banks trying to raise rates a little, before seeing them forced back down soon after.

1. Why UK interest rates could
stay lower for longer
than you think
Marcus Wright
RBS Economics
November 2015

2. Slide 2Source: Bloomberg, Macrobond
Of the OECD central banks that raised rates after 2008, all have
either lowered or begun to lower them again
4
7
7
9
15
17
19
21
22
24
25
25
26
38
55
Turkey (Jan-14)
Denmark (Apr-11)
Eurozone (Apr-11)
N. Zealand (Jun-10)
N.Zealand (Mar-14)
Sweden (Jul-10)
Chile (Jun-10)
Hungary (Nov-10)
Poland (Jan-11)
Korea (Jul-10)
Australia (Oct-09)
Israel (Aug-09)
Norway (Nov-09)
Iceland (Sep-11)
Canada (Jun-10)
Number of months from 1st rate hike to
first rate cut

3. What this is about
• Markets expect the Bank of England to start raising rates from
early next year. In 3 years Bank Rate is expected to be 1.5%. While
possible, it is not inevitable. We’ve seen these sorts of
expectations dashed before.
• The following slides set out the economic case for ‘lower for
longer’ interest rates in the UK.
• ‘Lower for longer’ doesn’t necessarily mean interest rates cannot
go up. It can also mean central banks trying to raise rates a little,
before seeing them forced back down soon after.

4. Source: BIS
UK inflation is determined globally – part 1
• Long term inflation
expectations are firmly on target
around the world. This means
less need for interest rate hikes,
since inflation is currently low.
• Things that drive price inflation
are now more responsive to
global factors. For example,
earnings growth has become
increasingly correlated across
economies.
0
1
2
3
4
5
6
7 Inflation Expectations Against Target
(%)Long-terminflation
expectations
Target
CH JP EA CA CZ NZ GB SE US PL NO KR PE AU HU TH CN CL CO MX PH BR RU ID IN TR
0
10
20
30
40
50
60
1996-2000 2003-07 2010-14
Correlationof Cross-Country* Wage
Growth (%)
# - AU,CA,CZ,EA,HU,JP,KO,NO,PO,SA,SW,SZ,UK,US

5. Source: Macrobond, ONS, Bloomberg, International Federation of Robotics
• The slowdown in UK real
earnings growth pre-dates the
financial crisis.
•Net migration, outsourcing,
offshoring and labour-saving
technology have kept a lid on
wage growth.
• Capped wage growth reduces
the likelihood of inflation picking
up too fast or too far.0
50
100
150
200
250
300
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 15-'17
F-cast
WorldwideSales of Industrial Robots
(000s)
UK inflation is determined globally – part 2

6. Source: Macrobond, Bloomberg
China is a big deflationary force for the world…
• Chinese export price inflation
explains a lot of what’s going on
at the moment
• Cheap goods from China were
a key factor in the pre-crisis
world of low inflation, low
interest rates and increased risk-
taking. They still are.
• China’s slowdown has so far
led to a drop in oil and raw
materials prices and a world
trade recession. Both mean less
inflation for us.
0
10
20
30
40
50
60
70
1971-85 1986-98 1999-2013
Causesof Inflation Variability in
Advanced Economies(%)
Inflationvariabilitycausedby the same common factor
Inflationvariabilitycausedby Chinese exportprices

7. Source: Macrobond, Bloomberg, Bank of England, Bank for International Settlements
…and it’s only going to continue as money continues to flow out
•China’s banks are sitting on
£10trn worth of deposits. As
China liberalises its financial
system these savings will flow
out of the country in search of
returns.
• Capital outflows will put
further pressure on the currency.
If China lets its currency float it
would make its exports cheaper
and lead to even lower prices
across the world.
-
2
4
6
8
10
China UK
Banking Sector Deposits (£ trn)
Households and Non-Financial Corporates
-30 -20 -10 0 10 20 30 40
China
Brazil
Russia
India
Poland
Indonesia
Mexico
South Africa
Malaysia
EM Currencies - Under/Over-Valuation
Estimate
(Real Effective Exchange Rate)
Increasingly
'under-valued'
Increasingly
'over-valued'

8. Source: IMF, Macrobond, Bloomberg
The global savings glut – it’s still there
• ‘Global imbalances’ matter.
The wall of savings moving from
‘surplus’ countries to ‘deficit’
countries is helping to keep
interest rates low in the latter
(e.g. the US and the UK).
•And there’s more to come.
Global savings are higher than
before the crisis. Emerging Asia
in particular and will have high
savings in the coming years.
10
15
20
25
30
35
40
45
50
1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020
Savings Ratios (% of GDP)
Global Global Forecast G7
G7 F-cast Emerging Asia Emerging Asia F-cast
-1,000
-500
0
500
1,000
1,500
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Global Imbalances
(Currenc Account Positions $Bn)
Australia
Spain
UK
US
Japan
Germany
China
Oil Producers

9. Source: Financial Stability Board, Macrobond, Bloomberg
Quantitative easing is going to continue in Europe and Japan
• Central banks are also keeping
rates down by buying up
government bonds (Quantitative
Easing or QE).
•While QE may have come to an
end in the US and the UK, the
European Central Bank will be
carrying on until Autumn 2016,
while the Bank of Japan’s
programme is open-ended.
0
20
40
60
80
100
120
140
160
180
200
2009 2010 2011 2012 2013 2014 2015
Central bank purchases ($Bn)
Fed Bank of England
Bank of Japan Bank of Japan Forecast Purchases
ECB ECB Foreast Purchases
-2
-1
0
1
2
3
4
Banks Ins. Comps
& Pens.Funds
Public FIs Non-Bank FIs Centralbanks
Change in share of financial assets
2007 - 2013 (percentage points)

10. Source: Macrobond, Bloomberg
Domestic reasons for low rates – part 1
1
1.5
2
2.5
3
3.5
4
4.5
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 -
2015
UK Services Inflation - % Y/Y
• Core inflation (which excludes
food & fuel) has been decreasing
for four years. And lower
inflation is not just about oil
prices and a stronger currency.
• Services inflation has dropped
well below the 3 – 4% it has
averaged for close to 20 years. It
is now averaging 2 – 3%.
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
UK Core Inflation (i.e. excluding food,
energyand other volatile items) % Y/Y

11. Source: Conference Board, Bank for International Settlements, Macrobond
• The UK’s productivity growth
following the crisis has been
exceptionally poor. There is no
single explanation as to why, but
the problem is deep-rooted.
•Without productivity growth
wage growth and economic
growth could easily fizzle out.
That means low inflation. And
low interest rates.
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
Greece
UK
Finland
Italy
Belgium
Netherlands
Norway
Cyprus
Switzerland
Germany
Sweden
Denmark
Austria
France
Turkey
Malta
Iceland
Luxembourg
Portugal
Spain
Ireland
Labour Productivity Growth 2008 - 2014
(Output per hour)
Domestic reasons for low rates – part 2
-2
3
8
13
18
-2
3
8
13
18
UK - Wage Growth v Productivity Growth
(% Y/Y Change)
Nominal Wage Growth
Productivity Growth

12. Source: Macrobond, Bloomberg, Office for Budget Responsibility
• There are substantial cuts in
public spending to come. For the
government to attain a budget
surplus it is likely that the private
sector will have to start
borrowing again. That is rarely
sustainable for long.
• It’s likely that for austerity to
succeed without causing a
recession, the Bank of England
will have to keep rates low.
Simultaneous fiscal and
monetary policy tightening
normally only achieves this
when exports are growing
strongly. And they aren’t.
-4
-2
0
2
4
6
8
10
1997 2000 2003 2006 2009 2012 2015 2018
Private Sector Financial Balance in the UK
(% of GDP)
PNFCsForecast PNFCs
Household Forecast Households
Total Private Sector
-12
-10
-8
-6
-4
-2
0
2
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
UK Budget Balance
(% of GDP)
Historical Data
IMF Forecast
OBR Forecast
Domestic reasons for low rates – part 3

13. Domestic reasons for low rates – part 4
• The debt service ratio has
come down, and it’s likely that
this has helped pave the way for
the recovery the UK has
experienced in recent years.
• But the UK economy remains
encumbered by a large level of
debt.
• It will be difficult raising
interest rates with the debt
overhang remaining so sizeable.
Source: BIS
0
50
100
150
200
250
300
2005 2007 2009 2011 2013 2015
UK Debt to GDP (%)Government
Households
Non-Financial Corporates
-10
-5
0
5
10
Den
Spa
UK
Hun
Por
SA
US
Aus
Jap
Ger
Ita
Kor
Cze
Pol
Mex
Swe
Bel
India
Fra
Indon
Bra
Neth
Thai
Mal
Tur
Rus
HKSAR
Chi
Debt Service Ratios
- Change since 2008, Private Non-Fin Sector

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14
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https://twitter.com/rbs_economics
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15. 15
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