In some cases they have lent money for fifty years at around 4%, and the interest rate on long-term UK government bonds is at its lowest level for over 50 years. Low and stable inflation clearly explains much of the fall in long-term interest rates which fell sharply when the Bank of England was made independent in 1997. But over the past three to four years long-term interest rates around the world have fallen further to remarkably low levels. In the UK, the annual interest rate on 20-year index-linked government bonds, after allowing for anticipated future inflation, is now around 1%. For most of the past 25 years, that so-called “real” rate of interest has varied between 2% and 4%. Long-term real interest rates of no more than 1% would normally be a signal to spend more, save less, and to invest in physical as well as financial assets. But it is not at all clear that rates will persist at such low levels. So is this particular signpost reliable? There are broadly two types of explanation for the fall in long-term real rates around the world. The first explains low interest rates as the outcome of an increased propensity to save and lower willingness to invest in the world as a whole. The second explains them as the result of rapid growth in money and credit which, in a “search for yield”, drives asset prices up and interest rates down.
And, by removing derivatives and certain structural features embedded in RMBS, it will improve the Bank’s ability to manage the risk associated with this collateral. Moreover, this initiative will also allow smaller counterparties, who do not have access to securitisation platforms, or for whom the cost of securitisation is prohibitively high, to access liquidity insurance in times of need.9 The Bank started processing applications for the pre-positioning of loans in the DWF in January 2011. At the same time as announcing that it would accept portfolios of loans as collateral, the Bank formalised the next steps in its ABS transparency initiative. Following on from its consultation in March 2010, the Bank announced that it would be phasing out the eligibility of residential MBS and covered bonds that did not conform to certain transparency criteria. During a year-long implementation period, running to November 2011, those securities that do not confirm to the new standards will remain eligible for use in the Bank’s operations. But over that period, counterparties should be working to ensure that they meet the new transparency requirements. Subsequently, in the year from November 2011 to November 2012, there will be a 12 month transition, during which the Bank will begin to apply increasingly large haircuts to those securities that do not conform to its requirements. By the end of November 2012, assets that do not comply will become ineligible. The transparency initiative will help the Bank risk-manage collateral more accurately and effectively.