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

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.