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There is a case for small increase in interest rates

The five years of sustained low interest rates have been good for some.

Those with mortgages have made some big savings (and the bigger your mortgage, the more you will have saved). Combined with quantitative easing (the printing of new money), the low rate has also benefited the banking sector as borrowing has increased and the financial markets have risen.

To some extent, the low rate has benefited the economy as a whole, in the short term at least, by encouraging consumers to borrow and spend.

But there have been losers, too, and yesterday some of them made their feelings known by staging a mock funeral outside the Bank of England to mark what they called the death of savings. The group that organised the protest, Save Our Savers, said the low interest rate had drastically reduced the return savers receive on their money. The protesters said rising prices had also left their mark and there was a reminder of the extent of inflation's power yesterday when Lloyds released figures showing the effect it has had on prices in the last 40 years.

The savers on Threadneedle Street said they would like to see interest rates increased and, although they were disappointed yesterday when the Bank of England held the rate at 0.5% , it is becoming harder to resist the logic of their argument. At the beginning of the financial crisis, there were perfectly good reasons to cut the interest rate and keep it low. The aim was the encourage the banks to lend and consumers to spend and, to some extent, that has been achieved.

However, the case for keeping rates at 0.5% is much weaker. Apart from anything else, there is a danger that such a sustained period of low-cost borrowing has encouraged people to borrow more than they will be able to afford when the rates start to go up again. In other words, the risk is that current monetary policy encourages people to borrow too much: one of the factors that led to the financial crisis in the first place.

A small rise in interest rates has the potential to begin to fix this problem and bring a welcome re-tuning of the economy away from borrowers and towards savers. The fact that there is a need for such a re-tuning was demonstrated by figures this week showing that one in five Scots are saving nothing at all and, of those who are, the average amount of savings has dropped by 6% in a year.

A rise in interest rates to reverse this trend would not only begin to repair the damage caused to ordinary saving schemes such as ISAs; it would also begin to repair the considerable damage caused to pensioners' incomes. Those who have reached retirement in the past five years have been particularly badly hit as their pension savings will have bought them a much lower pension income than in previous years.

Now that the economy is in a sustained period of recovery, the case for fixing this imbalance between savers and borrowers is overwhelming. The staging of a mock funeral outside the Bank of England may have been dramatic but the protesters who attended it had a point: a small rise in rates is overdue.

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Finance

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