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The 'New Normal'
Are 2%-3% interest rates the ‘New Normal’?

This week has seen a lot of confusing signals in the markets. Following on from last week’s article about the Italian banking issues we have seen the problems in the German banking system exposed by the fine imposed on Deutsche Bank by the American Department of Justice [DoJ]. Reality is starting to hit home in the Eurozone. America dealt with their banking problems decisively after the 2008 Financial Crash. The UK took a slower and longer term route, but most of the UK banks are also in reasonable shape. However, the Eurozone has done very little to re-capitalise their banks.  Time will tell if the Eurozone countries are doing enough to resolve this problem.

Sterling took a tumble after Theresa May’s Tory conference speech suggesting that Britain is heading for a ‘Hard Brexit’ which instantly took the 250 to a new high on the speculation that British companies might increase their exports. Although a hard Brexit could be bad news for the financial services in the city, a weaker pound and some trade tariffs might benefit some of our other industries if the market responces are anything to go by.

This time last year we were talking about potential interest rate rises by December. Twelve months on and the base rate has fallen to 0.25%.  As I mentioned before this has affected pensioners badly in terms of the interest they will receive on their savings on deposit at the bank. There is talk that businesses will start being charged interest on the capital that they hold with the banks - negative interest rates!

When I started in the industry nearly 20 years ago we used to say annuity rates were low at 7% and 8% and perhaps it might be wise to hold back from buying an annuity until rates rise. With annuities close to half that today we are still saying the same thing, consider using a Flexible Access Drawdown scheme with the view of being able to buy a higher rate annuity in the future.

In a meeting with a fund manager this week the topic of interest rates came up. What will be the new high point for interest rates in the new world?

 

The chart below shows the 10 year US treasury Constant Maturity Rate which is considered the risk free return and is used to help price other fixed interest securities such as Corporate bonds. If this index falls, then the cost of borrowing will become cheaper and if it rises the cost for borrowing becomes greater.
Considering the trend lines, we can see that the cost of borrowing has been falling since the early eighties. Every time interest rates have fallen they have not recovered to the same level as before the drop.

Therefore, it wouldn’t be an unreasonable assumption to say that it will be sometime before we start to see interest rates reaching normality at 5%. In fact 2-3% is likely to be the ‘New Normal’.

Exeter Financial Advisor

The high interest rates of the 1980’s seem like an eternity away now. Those who could  afford to buy a house at the time will have endured considerable financial pain. I remember friends of mine cooking enough chilli at the weekend to last all week to cope with the high mortgage rates. Although, I don’t wish to see a return to people eating chilli seven days per week, a little inflation would be useful to reduce our debts in relation to our income.
In the meantime, savers and investors need to consider that waiting for interest rates to rise could be a fool’s errand and you would mostly likely benefit from financial planning and investment guidance to achieve your income and savings objectives.

Most wealth managers offer a free consultation; don’t sit at home worrying about how to deal with your financial problems, pop in and ask for guidance. Just be careful, even I received a call from a cheeky chappie telling me that my pension is most likely not doing very well and I could be being charged 4% per year. When I have the time these calls can be fun!!
     
 
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