A record was broken during the latest wave of selling on the world’s stock markets. As share prices plunged the yield on 10-year UK government gilts fell to levels never seen before.  Should he wish to do so, George Osborne could borrow money in the markets more cheaply than any of his predecessors: neither Benjamin Disraeli nor William Gladstone (a particular hero of the chancellor) enjoyed interest rates as low as 1.29%.  Osborne will regard record-low gilt yields as evidence that investors have confidence in the handling of the public finances – which up to a point is correct but hardly qualifies as the truth, the whole truth and nothing but the truth.  It is certainly the case that low interest rates on gilts are in contrast to rising yields in some of the countries on the periphery of the eurozone, such as Greece and Portugal. But UK bond yields are not that much lower than those in Spain and Portugal, which hit 7% during the worst of the eurozone crisis in 2012.  If Britain really was considered a safe haven in times of trouble, sterling would be going up on the foreign exchanges rather than falling against the dollar, euro and yen. There would also be much stronger bids for gilts in the auctions conducted by the government than appears to be the case now.  The real reason that gilt yields are so low is that the date for an increase in UK interest rates from the Bank of England has receded so far into the distance that it would take the Hubble telescope to pinpoint it. Gilt yields tend to go up when rising inflationary pressure leads to investors becoming fearful of the Bank of England pushing up interest rates.  Inflation is currently 0.2% and its expected rise over the coming months will be checked by the turmoil in the markets, itself a reflection of weakening global growth prospects. Surprisingly few eyebrows were raised when the Economist Intelligence Unit predicted that there would be no increase in interest rates until 2020, the year of the next general election.  Indeed, the idea that the Bank’s next move could be to provide more stimulus – either through a cut in interest rates or via an expansion of its quantitative easing programme – is quietly gaining traction. Threadneedle Street believes the UK banks and building societies could cope with a cut in interest rates from 0.5%; it also believes that previous dollops of QE boosted both activity and inflation.  An alternative way of achieving the same result would be for Osborne to announce in his budget that he was embarking on a programme to improve Britain’s public infrastructure. He would, of course, have to borrow money (and swallow a large dish of humble pie) to do so. But by continuing to rely on monetary policy alone he could be missing out on a once-in-a-lifetime opportunity.
The Bank of England’s next move could be more QE or even interest rate cuts. But would Osborne ever consider the activity booster of infrastructure investment?