§ Mr. Austin Mitchellasked the Chancellor of the Exchequer what was the real rate of interest in 1979; and how this compares with the rate each year from 1945 onwards.
§ Mr. LawsonTo calculate the real rate of interest on loans and securities of any period to maturity requires com- paring the nominal rate of interest on such loans or securities with the inflationary expectations of lenders and borrowers over the same period. Since inflationary expectations cannot be measured, real rates of interest cannot properly be calculated. It is, however, possible to calculate figures that might approximate to real short term interest rates by using, say, recent inflationary experience as a proxy for current short-term inflationary expectations. Such a proxy would, however, certainly not be adequate for estimating long term real interest rates.
The following table shows notional three month real interest rates calculated in this way, i.e. by comparing, for each quarter, the actual average rate of inflation in that three months over the previous three months—at an annual rate—with average three month interest rates ruling over the quarter. Annual figures are shown as geometric averages of the quarterly figures. Insufficient information is available in respect of years before 1955. It should be noted that similar calculations could be done using other proxies for inflationary expectations. The choice would depend on the purpose to which the data were being put.
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IMPLIED REAL RATES OF INTEREST 1955–79 Percentage Quarterly Annual average 1955—1st quarter N/A N/A 2nd quarter 1.7 3rd quarter -7.1 4th quarter -1.1 1956— 1st quarter -0.7 0 2nd quarter 6.3 3rd quarter -1.6 4th quarter -3.8 1957— 1st quarter 14.1 1.6 2nd quarter 0.6 3rd quarter -6.9 4th quarter -0.1 700W
Percentage Quarterly Annual average 1958—1st quarter 6.0 3.9 2nd quarter 1.3 3rd quarter 6.2 4th quarter 2.3 1959—1st quarter 5.9 3.9 2nd quarter -5.6 3rd quarter 13.4 4th quarter 2.9 1960—1st quarter 8.1 3.7 2nd quarter -1.3 3rd quarter 6.8 4th quarter 1.3 1961—1st quarter 3.6 3.6 2nd quarter 5.7 3rd quarter -9.0 4th quarter 15.7 1962 1st quarter -0.9 1.2 2nd quarter 3.5 3rd quarter 4.6 4th quarter 0.4 1963—1st quarter 3.7 1.2 2nd quarter 1.7 3rd quarter -1.3 4th quarter 0.8 1964—1st quarter 7.4 0.5 2nd quarter -2.6 3rd quarter -3.2 4th quarter 0.7 1965—1st quarter 7.8 2.8 2nd quarter 4.5 3rd quarter -4.6 4th quarter 3.9 1966—1st quarter 4.0 3.8 2nd quarter 2.1 3rd quarter -1.6 4th quarter 10.9 1967—1st quarter 4.5 2.1 2nd quarter 1.8 3rd quarter -0.9 4th quarter 3.1 1968—1st quarter 11.2 5.0 2nd quarter 4.7 3rd quarter -2.1 4th quarter 6.6 1969—1st quarter 6.7 4.5 2nd quarter 6.7 3rd quarter 4.4 4th quarter 0.4 1970—1st quarter 4.0 -1.0 2nd quarter -0.1 3rd quarter -1.3 4th quarter -6.5 1971—1st quarter 3.7 -5.0 2nd quarter -5.2 3rd quarter -10.6 4th quarter -7.3 1972—1st quarter 5.6 -2.8 2nd quarter -3.5 3rd quarter -9.4 4th quarter -3.3 1973—1st quarter 12.9 3.1 2nd quarter 9.8 3rd quarter -5.8 4th quarter -3.3
Percentage Quarterly Annual average 1974—1st quarter 8.0 -7.0 2nd quarter -1.2 3rd quarter -21.7 4th quarter -10.5 1975—1st quarter -17.5 -10.1 2nd quarter -10.2 3rd quarter -10.7 4th quarter -1.2 1976—1st quarter 0 -0.2 2nd quarter -3.6 3rd quarter +1.4 4th quarter +1.6 1977—1st quarter -2.0 -2.1 2nd quarter -1.0 3rd quarter -7.4 4th quarter +2.2 1978—1st quarter -10.1 -1.3 2nd quarter +2.9 3rd quarter -2.4 4th quarter +5.0 1979—1st quarter +3.3 2nd quarter -6.4 3rd quarter -3.9* * Estimate. Notes:
(1) Quarterly real interest rates, r, have been calculated on the formula:
r = (1+p) (q1/q2)4-1
where:
p = 3 month interest rate (average over the quarter). For 1968 and succeeding years the 3 month inter-bank rate has been used; prior to 1968 the commercial bill rate has been used; the figures for 1955–62 have been derived on a slightly different basis from those for 1962–68.
q = The GDP(E)—total home costs—deflator, expressed in index number form and seasonally adjusted. (See for example, Economic Trends, Annual Supplement, 1980, p. 5). q1 and q2 are the GDP(E) deflator for each quarter and the previous quarter respectively.
(2) Annual average real interest rates, R, have been calculated on the formula:
R = [(r1+1) (r2+1) (r3+1) (r4+1)]¼-1.
where r1,2,3,4, are the real interest rates for each quarter.