March 05 ,2014 | by Hari Sri

5 Years of Low Interest Rates: Who Wins?

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Five years ago to this day, the Bank of England cut interest rates to a record low – and they haven’t moved since. We look at the flip side of low interest mortgages and consumers having more to spend …

 

On this day five years ago, 5 March 2009, the Bank of England (BoE) took the decision to cut interest rates to a historic low of 0.5 per cent. Few expected that it would still be there half a decade later.

Speculation continues about when BoE will decide to increase the base rate. Last year Governor Mark Carney suggested that BoE might not consider the move until unemployment is back below the seven per cent mark, but joblessness has fallen more quickly than he expected. Most recently, BoE’s Martin Weale suggested the decision may be taken in spring 2015.

During economic turmoil it has made sense to keep interest rates at a stable and low level. Reducing the cost of repaying debts has several effects that are vital in a recession, but it can also create further problems. So what are the consequences of five years at 0.5 per cent?

 

Mortgages have been more affordable than they were before March 2009, both for first-time buyers and existing homeowners. For some that has been a huge boon. With the cost of living rising and many concerned about their job security during the recession, the increase in possessions reported during the recession could certainly have been much worse.

Businesses have also done fairly well out of the era of low rates, with many who would otherwise have struggled finding it much easier to service their debts and save cash to keep their operations running smoothly. Because mortgages have stayed at relatively low rates, consumers have had more cash to spend, which has kept many businesses going.

 

But the broader economic policy championed by BoE has been a double-edged sword. Quantitative easing has pumped money into the economy to the point where inflation has mostly exceeded targets in the past five years. This has contributed to rising costs for both companies and consumers.

It’s just as well the policy encourages spending, since there seems to have been little incentive for saving money. With rising inflation and precious little by way of interest payments, savers have failed to see their accounts grow and for many they’re now worthless, especially those with small deposits. According to a recent report from McKinsey, small savers have lost close to £65 billion in interest payments alone.

 

Whenever BoE decides to end the era of ultra-low rates, it may be that the biggest concern is a culture of dependency.

Philip Brabin, LSBF ACCA Lecturer, said, “An interest rate rise now would bring about a degree of financial realism in the context of a debt fuelled recovery, lessening the eventual financial suffering that awaits households when interest rates inevitably rise.”

“Interest rates will have to be raised eventually because at this artificially low rate it is destroying savings and distorting the property markets, as well leading to higher potential inflation,” added Dr Richard Osborne, LSBF Associate Lecturer.

 

As Nationwide chief executive Graham Beale said in a recent blog, there are now many homeowners who have never seen interest rates rise. The same could be said for any number of new businesses.

It’s a good thing Mr Weale said that increases would be gradual – the economy may be in for a shock.

 

 

Interested in developing your financial forecasting and budgeting skills? We offer an Advanced Certificate Programme in Financial Planning and Analysis for those wishing to hone their expertise in the subject.

 

<Image courtesy World Economic Forum/Some rights reserved>

Hari Sri

Hari is the LSBF Blog's News Editor. He manages the editorial content on the blog and writes about current affairs, SME, entrepreneurship, energy, education and emerging market news.

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