THE CONSEQUENCES OF ULTRA-LOW INTEREST RATES
Following the latest Bank Of England Monetary Policy Committee Meeting rates remained, as expected, at 0.5%. The consensus is that in early 2016 we may see a rise to 0.75% with small increases occurring regularly.
Bell & Company are not the only ones focusing their attention on the issue of Interest Rate changes. Hamish McRae is one of Europe’s foremost economic speakers and journalist who specialises in global future trends – he is highly respected and recently published an article on the effects of the low interest rate period.
Mr McRae states that when circumstances seem to be in place for the US Federal Reserve and UK Bank of England to increase Interest Rates something turns up. These include the second Eurozone recession, inaccurate data on the UK economy, falling oil prices and the Chinese economic slowdown. All of these problems have been more or less non consequential. For example, Greece’s demise is a sideshow, UK economic growth has been steady, falling oil prices has seen a boost in consumption worldwide and a slowdown in China’s economic growth was expected and essential for the growth in the developed world.
As the issues the Bank of England highlighted above never arose to cause serious economic harm other issues have arisen due to the extended period of low Interest Rates:
- Wealth Inequality
There is a focus on income inequality but an issue under the radar has been the increase in wealth inequality. As asset prices in some areas have soared and those who have multiple assets have benefited massively.
- Property Prices Worldwide
A slightly London centric view point here but residential property price increases have been incredibly damaging. The same phenomenon has occurred in New York, Berlin and Mumbai. We all know the Northern Irish situation is different but nonetheless price increases are starting to occur albeit slowly.
- Pension Poverty
Pension funds are held in Government Bond Yields which have been held down for regulatory purposes – Pensioners have suffered a double hit.
- Cheating Unsophisticated Savers
Those who do not have access to specialist advice on getting a better return have failed to take the money out of the bank and putting it into a portfolio of performing assets.
- Encouraging Risk Takers
Savers are taking on ill-understood risks and overextending themselves on the basis Central Banks will keep rates low.
- Long-term damage to the financial system
This is hard to pin down as we won’t see the effects for years to come. But low rates mean people are avoiding Banks and this has a few consequences. The use of cash has risen sharply and it is hard to measure peer-to-peer transactions. But by reducing risk in the Banking sector the authorities are increasing it in other sectors as low returns encourages risky innovation.
The half a dozen points raised are already in effect but Mr McRae highlights another concern around the corner – inflation. Firstly, central banks have created asset inflation that resembles a price bubble which could burst. Furthermore, around the corner could be inflation in goods and services. Private sector wages are rising at the fastest rates in 15 years and this will fade into costs in the coming months as the effect of low oil prices wears off. When inflation turns up the Bank of England will have to react, but given their concerns of external factors out of their control highlighted earlier it may be too late to head off domestic inflation which was in their control. Due to delayed action to date when Interest Rates do rise they will have to at a faster rate than we expect.
Bell & Company are urging homeowners who are concerned about the effects a rise in Interest Rates in the future to get in contact NOW. Even if you are in negative equity we can assist. Furthermore, if you think it will be fine I can re-mortgage back onto a fixed rate product then think again. Following the Mortgage Market Review borrowers will find re-mortgaging a trying process and there is concern for the elderly or younger families with varying income could become mortgage prisoners.
Should you or anyone you know be concerned by the issues raised then please call the office on 02895 217 373 to arrange your free initial consultation. Our Negative Equity Resolution team will be able to discuss your scenario and tailor advice to ensure the matter can be resolved.