After US rate rise, the UK will follow suit soon, but what is the ‘new normal’?

It has begun, and you might think about time too. Over the next few years interest rates worldwide will follow the Fed’s action and gradually be nudged upwards. The path will not be even, for there will be steps back as well as forwards, and in any case the different regions of the world will move more quickly than others. But the general direction is clear. Until there is another global recession, which one day will happen, interest rates will gradually return to normal.

What is normal? Will the “new normal” be the same as the “old normal”? History gives us only the vaguest of guides. We know that rates now are the lowest they have ever been. Yes, ever. They are the lowest since the founding of the Bank of England in 1694, the emergence of organised banking in Europe in the Middle Ages, indeed since the Babylonian Empire around 2000BC. We may have come to think of ultra-cheap money as commonplace. But historically it is profoundly abnormal.

The price of money is influenced deeply by inflation. So the rate at which interest rates rise will be shaped by what happens to prices. Will inflation return to the target of around 2 per cent, a little below in the case of Europe, or will it remain well below that, as it is now?

Low interest rates enable a government to hold down the cost of servicing its national debt. Taxpayers benefit at the expense of savers, and taxpayers apparently have more political clout. But in addition relatively low rates make it easier to finance large investment projects and hence support growth. So it may well be that the new normal level of rates is lower than the old normal one. We live in a deeply indebted world, and the impact will vary in different parts of it.