Five years of record low interest rates
Today marks the fifth anniversary of the Bank of England cutting base rates to a record low. Jason Hollands comments on the profound impact this has had on savers, borrowers, retirees and investors.
While there is broad agreement that ultra-low interest rates have been pivotal to keeping the UK economy afloat since the financial crisis, there have been clear winners and losers from this policy and other highly accommodative measures such as quantitative easing.
The winners have been borrowers, both at the personal and corporate level, as well as owners of assets such as shares and property.
The losers have been the nation's army of frugal savers who've endured the misery of derisory interest rates and negative real returns after inflation for a prolonged period on their cash deposits. But let's also not forget anyone who has found themselves in the uncomfortable position of purchasing an annuity during this period and ended up a victim of the low yield environment.
Ultra low rates and other highly accommodative policies have combined to supress yields on low risk bond assets, such as government bonds, reduce the cost of borrowing and push investors further up the risk spectrum in order to get a real return over and above inflation.
That and similar measures across the globe from other central banks have helped supercharge the returns on equities over this period. In effect we have seen a transfer of wealth from inherently more cautious cash savers to owners of riskier assets through the transmission mechanisms of central bank policies.
At the company level, the era of cheap money has in effect relatively rewarded weaker businesses over well established, lowly geared “quality” companies. Corporates carrying debt on their balance sheets have been able to refinance on generous terms, reduce their debt servicing costs and report earnings growth as a result and without demonstrating true sales growth.
Of course this policy must eventually come to an end. And while Mark Carney, in recently announcing revisions to the Bank of England's forward guidance has largely staved off expectations of rate rises this year, the end is nigh.
Whether you are a borrower geared to the hilt, a buyer chasing spiralling residential property prices or an investor who has moved deliberately or by default heavily into equities and away from bonds, you need to factor an eventual rise in interest rates into future expectations. When policy turns there will once again be relative winners and losers.
This article does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers.