Ultra Low Rates to stay?

Ultra low interest rates, keeping unsecured loans, credit cards and mortgage repayments at the lowest they have been in years, could be here for the foreseeable future. Gertjan Vlieghe, one of the nine members of the Bank of England’s Threadneedle Street’s Monetary Policy Committee, that sets the official cost of borrowing, said debt, demographics and distribution of income could all depress interest rates. Plus a further fall in oil prices, and shares at their lowest since 2012, is all evidence that the ultra-low rates are here to stay.

This is Vlieghes first speech since becoming a member and he stated that policymakers should not assume that “the future will look like the past” and must “be prepared for the possibility that real interest rates will remain well below their historical average for a very long time”.

With the closure of Wall Street for the Martin Luther King public holiday (Monday January 18th), it was a quieter day on financial markets before overnight growth news from China. The FTSE 100 Index fell 24 points to 5779.9. Furthermore, official lifting of sanctions against Iran should lead to an increase in oil supply, with then cost of crude already beginning to decline. In early trading in London, Brent crude fell to $27.67 a barrel before recovering to $28.80 by the close of business. A Commerzbank senior analyst, Carsten Fritsch, stated “Iran’s return to the oil market has been on the agenda for some time and therefore does not really come as any great surprise; nonetheless, prices were bound to react negatively in the short term in view of the negative market sentiment.” Oil has fallen by more than $85 dollars a barrel from its peak of $115 in August 2014, which led to lower inflation and less pressure on the Banks to raise interest rates.

Vlieghe also stated that it was no longer difficult to imagine a world where all three D’s interacted. “A high debt economy faces headwinds and needs lower interest rates. A high debt economy with adverse demographic trends needs even lower interest rates. And a high debt economy with adverse demographic trends and higher inequality … well, you get the picture.” He also claims that longer term factors will help to keep borrowing costs low. Higher levels of debt would make interest rates ineffective in raising spending levels; a longer-living population would be saving more for retirement; and a more unequal distribution of income

By March 2016, the Monetary Policy Committee will have held rates at 0.5% for a staggering 7 years, and as only one member voted for an increase in this Januarys meeting, the City do not anticipate any further rises until late 2016 or early 2017. So now is the time to borrow for that unsecured loan.

The Banks governor, Mark Carney is due to give his views on the economy soon, but Vlieghe made it clear he was in no hurry to vote for an increase. “If I were confident that, over the next few years, policy rates would have to rise significantly to match historical averages of real interest rates, I would be looking for the first possible opportunity to raise rates, to avoid having to raise them very sharply in the next few years. But I am not confident of that at all. Rather, I think it is plausible that the appropriate real interest rate for the economy might be very low for years to come. So policy rates, when they rise, may not need to rise by much over the coming years. These medium-term considerations make me relatively more patient before raising rates.”

Vlieghe also said that he he saw little evidence that falling unemployment was having a knock on effect on pay. “In order to be confident enough of the medium-term inflation outlook to raise the bank rate, I would like to see evidence that growth is not slowing further, and that a broad range of indicators related to inflation are generally on an upward trajectory from their current low levels. I do not see convincing evidence yet of upward momentum in pay pressures. With growth still slowing, and inflation pressures either easing outright or disappointing relative to forecasts, I do not believe the conditions are in place to warrant a rise in the bank rate.”