Low interest rates look like being the long term norm

by Neil Patterson

12:06 PM, 14th November 2014
About 4 years ago

Low interest rates look like being the long term norm

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Low interest rates look like being the long term norm

After the Bank of England quarterly inflation report, and attending the regional seminar, all the latest indicators have revised down any risk of a rise in the Bank Base Rate.Bank of England

I have been arguing for some time against the need to increase rates based on economic headwinds, but the latest figures all show a marked decrease in inflationary pressure and general world wide stagnation especially in Europe.

Market expectations of interest rates

 

 

You can see in this chart to the left how market expectations for interest rates have suddenly been revised down

 

 

 

 

 

5 year forward rates

 

 

The Chart to the right demonstrates why fixed rate mortgages have been falling with a marked decrease in the cost of 5 year nominal interest rates.

 

 

 

 

 

CPI inflation

 

 

Although a rate decrease is less likely to be considered than stimulating the economy with further Quantitative Easing nothing is as yet off the table. This is because the Bank of England have to report to the government if inflation levels drop below the target of 2%. You can see from the chart to the left that we are heading towards 1% inflation.

The inflation rate is important to the government as it is very difficult to reduce the deficit without the assistance of increasing prices and tax revenue. In fact despite government efforts in making cuts the budget deficit this year will not actually fall at all. Increases in the welfare state budget were capped at 1%, but inflation is falling back down to this level so there have been no real budgetary cuts.

Labour forceUnemployment is now at its lowest level since 2007 and this would normally cause an upward inflationary pressure. However as can be seen in the table to the right there has been a fundamental change in the composition of the labour force with a greater percentage moving away from high skilled, high earning jobs to more low skilled, low income jobs.

Western economies have shifted towards being less business friendly with ever greater regulation and costs with no political incentive to reverse this. Therefore it is likely that interest rates could stay low in the medium and even long term as the world markets correct themselves.



Comments

Jonathan Clarke

9:24 AM, 15th November 2014
About 4 years ago

Its all good news to wake up to. It keeps those yields high. Yes it will take inflation longer to erode my mortgage debt but I can live with that. A low BBR is far more welcomed. Long may it continue.

Neil Patterson

16:52 PM, 15th November 2014
About 4 years ago

You would love the Euro rate expectations then Jonathan.

I am personally more worried about deflation as that is a really viscous spiral.

Onslow Clough

19:06 PM, 17th November 2014
About 4 years ago

All good news for landlords but not so good for lenders, makes the forthcoming ruling regarding West Brom even more important as i'm sure there are plenty of other institutions looking for the slightest excuse to increase rates.

Neil Patterson

19:41 PM, 17th November 2014
About 4 years ago

Yes I agree the economic outlook has deteriorated which is bad news for banks.

However it is not so much the rate but the margin that banks can charge that makes all the difference along with the increased ratio of capital they have to carry compared to lending.

Ali Shah

5:48 AM, 6th May 2015
About 4 years ago

hi, just wanted to ask

1. When does the BOE announces interest rates i.e. in which months

2. And do you expect any change in interest rates over the next two years or at least till Mid Jun 2016?

thanks

Neil Patterson

7:30 AM, 6th May 2015
About 4 years ago

Hi Ali,

The Monetary policy committee meet every month on the first full week Thursday of the month and vote on interest rate levels and Quantitative Easing.

Please see my latest article on BofE interest rate projections for a more up to date picture 🙂

>> http://www.property118.com/bank-england-lowest-interest-rate-projections-yet/72271/

Ali Shah

6:10 AM, 7th May 2015
About 4 years ago

Reply to the comment left by "Neil Patterson" at "06/05/2015 - 07:30":

thanks for the article - will go through


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