This week saw a pretty depressing anniversary: the UK base rate has now been at 0.5% for five long years. Five years is enough time for most people to get used to anything. So it is worth remembering how extraordinary this is. We have records of UK rates going back to the late 1600s, so we know that they have never been this low before.
Interest rates are at 300-year lows. There have been huge winners from this – anyone with a mortgage they shouldn’t really be able to afford, banks, big companies who can easily take out cheap debt, the government (which has been able to keep borrowing at very low rates), and holders of real assets (who have benefited as equity markets have soared).
But there have been all too many losers too. Anyone holding cash has lost substantially in real (after-inflation) terms. Pressure group Save our Savers estimates that keeping rates so far below what is deemed normal (a few percentage points above inflation) has cost the nation’s savers £326bn.
Businesses with defined-benefit pension schemes have been in endless trouble as low rates make their future liabilities look higher and higher. Anyone buying an annuity has had their retirement outlook permanently changed (in a bad way).
Finally, first-time buyers have been hurt by ongoing high house prices – normal rates would have given us a proper crash and a normalisation of prices relative to incomes.
You might think the losers are starting to outweigh the winners. We’d be tempted to agree. But that doesn’t mean rates will return to normal any time soon. Why? Because low rates aren’t just about trying to get the economy moving again (something they have clearly failed to do particularly well). Instead, they are about government debt and how we pay it down.
Chris Andrew and Mustafa Zaidi of asset managers Clarmond explain. The sovereign debt of the developed world has risen from around 80% of GDP to around 110% over the period in which “interest rates have fallen to nothing”. Keeping rates low keeps interest payments on that debt low, which saves governments from having either to borrow even more to meet their payments, or to levy new taxes to do so.
Look at it like that, and the unreceived interest represented by the gap between 0.5% and a normal interest rate is “nothing short of being an undeclared tax levied by the state” – one focused on savers.
This can’t change unless we suddenly see growth rapid enough to create the tax revenues to fill the gap, or inflation high enough to reduce its real value to manageable levels. We won’t hold our breath for the first.
On a happier note, we are planning to take readers on our first ever MoneyWeek cruise in June. John and I will both be aboard as we wind our way from Venice to Istanbul. There are still some cabins left and we’d love you to join us. See here for more details.