Ultra-low interest rates are not normal, and not fair

When our ultra-low interest rates do go up – as they must – we will find that more people stand to benefit than lose out.

When I was interviewed for the BBC's Panorama last week, the presenter, Adam Shaw, asked me why interest rates can't just stay low forever. The answer is because if they do you'll get inflation. Lots of it.

Right now, rates are still at their lowest for over 300 years. Not just at the lowest, but one quarter of the previous lowest rate. So, very low.

So far, you might think that hasn't really been much of a problem. People who might have lost their homes without the collapse of their mortgage rate payments are still in their homes. Our banks, if not entirely solvent, are still with us. And we have the beginnings of a fine looking economic recovery.

But look at little closer and you will remember that the UK spent the last 40 odd years in a battle against inflation, a battle we aren't so good at winning. Consumer prices are up 20% or so in the last six years, and ultra-low rates have also worked to force investors and savers out of cash and into asset markets. Look at the fast rise in the stockmarket, the price of art, and now, again, of houses that's inflation too.

Mark Carney will hold interest rates down as long as he can he wants the recovery to get as much traction as possible before the monetary environment normalizes. Falling CPI numbers will give him plenty of excuse to delay (remember unemployment hitting 7% is not a trigger for higher rates but a "waystation"). But one day inflation fears brought on by a rise in borrowing, lending and the money supply - will mean he can delay no more. Note that the OCED's upgrade of the UK's 2014 growth from 0.9% to 2.4% is the biggest of any OECD country.

But there's another reason why rates can't stay super-low for ever: it's not fair.

Look at the winners from very low monetary policy the ones for whom bad news is good news as long as bad news keeps rates low. They are the very indebted and in particular those with mortgages they couldn't dare to dream of servicing at normal interest rates.*

It is those who can't even pay their mortgages on today's low rates forbearance in the form of interest-only transfers and payment holidays has kept them on the road until now.

And it is what you might call zombie companies. Begbies Traynor reckons that more than one in seven business, or over 400,000, are currently generating only just enough cash to pay the interest on their debts. Others reckon it is more like 6-7%. But either way, it's a lot of companies. Companies that in a normal interest environment just wouldn't be with us any more.

A huge number of people are living in the homes and working for the companies that can be counted among the winners. But you can easily argue that there are more losers.

Anyone who wanted to buy a house at the right price or to get a return on their savings. Anyone attempting to value anything based on its fundamental attractions. Anyone with cash and no mortgage (remember that a good 60% of the UK's houses are held mortgage-free). Anyone who has had to buy, or is near to buying, an annuity.

The "big message", says Hamish McRae in the Independent, is that overall, "ordinary Britons have been net losers from easy monetary policy."

When rates rise, all this could reverse very quickly. Once we get more economic growth and interest rates rising, "we will see more zombies die," says KPMG's Richard Fleming in the FT.

Mortgage rates will rise, pushing the people hanging on the edge of affording payments over that edge. But savings rates will rise too giving those with cash savings something of a return on them, finally.

There is a view that rising rates are somehow a bad thing. But when they finally come, I suspect we will find there are more winners than losers. Which is surely as it should be.

* If you are in debt and aren't that bothered about rate rises you might have forgotten a bit of monetary history. In the 1970s, rates rose from 5% to 13% in 18 months, and then from 6.5% to 17% in 15 months.

Recommended

Are recession fears justified? Maybe it’s time to look on the bright side
Economy

Are recession fears justified? Maybe it’s time to look on the bright side

There's a lot to feel nervous about right now, and many people are worrying about an impending recession. But it's by no means certain, says John Step…
28 Jan 2022
Inflation: now we really have something to worry about
Inflation

Inflation: now we really have something to worry about

We’ve been worrying about a sharp rise in inflation for years, says Merryn Somerset Webb – now, we finally have something to worry about.
21 Jan 2022
UK inflation is at a 30-year high and it hasn’t peaked yet
Inflation

UK inflation is at a 30-year high and it hasn’t peaked yet

UK inflation has hit 5.4% - its highest in 30 years. And it could be heading higher. John Stepek explains what it means for you and your money.
19 Jan 2022
The UK jobs market is booming – but wages are struggling to keep up with prices
UK Economy

The UK jobs market is booming – but wages are struggling to keep up with prices

Britain’s jobs market is booming, with wages rising and plenty of of vacancies. But inflation is rising faster than wages can keep up. John Stepek loo…
18 Jan 2022

Most Popular

Amazon halts plans to ban UK Visa credit card payments
Personal finance

Amazon halts plans to ban UK Visa credit card payments

Amazon has said that it is to shelve its proposed ban on UK customers making payments with Visa credit cards.
17 Jan 2022
Shareholder capitalism: why we must return power to listed companies’ ultimate owners
Investment strategy

Shareholder capitalism: why we must return power to listed companies’ ultimate owners

Under our system of shareholder capitalism it's not fund managers, it‘s the individual investors – the company's ultimate owners – who should be telli…
24 Jan 2022
Temple Bar’s Ian Lance and Nick Purves: the essence of value investing
Investment strategy

Temple Bar’s Ian Lance and Nick Purves: the essence of value investing

Ian Lance and Nick Purves of the Temple Bar investment trust explain the essence of “value investing” – buying something for less than its intrinsic v…
14 Jan 2022