Seven years of record low interest rates: the winners and losers
Saturday 5 March marks seven years since the introduction of Quantitative Easing (QE) in the UK and the Bank of England’s decision to cut the base rate to 0.5%.
While the BOE governor Mark Carney has previously hinted of an interest rate rise, it now seems unlikely in 2016 and some forecasters have even suggested rates may fall lower amid concerns of falling oil prices and the stability of the global economy.
New research from The Share Centre found that 24% of 2,000 people surveyed thought a rate rise would not happen until the third quarter of 2017 or later, and with cash earning little in the way of interest, many aren’t fearful of interest rate rises.
But what has been the impact of seven years of 0.5% interest rates? Below we explain the winners and the losers.
What it’s meant for borrowers and investors
Laith Khalaf, a senior analyst at Hargreaves Lansdown, said the returns on cash had been “annihilated” and estimated those holding cash have lost out on £160bn in interest, equivalent to £6,000 per household.
He added that overall, borrowers and investors have had “the best of it” since QE started in the UK.
“Mortgage costs have fallen significantly from pre-crisis levels, but this positive effect is laced with an underlying risk. If borrowers get too comfortable taking on high levels of debt at low interest rates, they could be in for a nasty shock if and when rates rise.”
Since 2009, 1.8 million first time buyers have entered the property market and they have no experience of anything other than low costs of borrowing.
Mortgage rates have averaged 3.4% since March 2009, compared with an average of 5.8% in the previous 10 years. On a repayment mortgage of £200,000 that works out as £270 less each month, or £3,280 less each year. The average mortgage rate on outstanding debt now stands at 2.96%, its lowest level since BOE records began in 1999.
The loose monetary policy has supported rises in stock, bond and property prices over the last seven years. Khalaf said: “Investors have enjoyed strong returns from both the stock market and the bond market and QE has helped to supply both liquidity and confidence to markets. Meanwhile low interest rates have helped companies access debt markets cheaply, while making their dividend streams look very appealing to investors.”
The table below from Hargreaves Lansdown highlights how savers and investors have been affected over the past seven years.
According to Adrian Lowcock, head of investing at AXA Self Investor, the seven year lows has meant cash has lost over 10% in value. Since March 2009, CPI inflation has risen 16.24% and the inflation has eroded the value of cash, even before any interest is earned by an average of 2.3% per year.
The low interest rates also mean that annuity rates have been at historically low levels and Steven Cameron, pensions director at Aegon, said: “Annuity providers base the rates they can offer on the return on long term fixed interest investments such as government bonds or corporate bonds. Low base rates tend to be accompanied by correspondingly low yields on these investments, and when coupled with the Chancellor’s programme of QE, means annuity rates have been at a historically low level for the last seven years.”
However, borrowers have seen the cost of their loans plummet. “Many people will have had an opportunity to pay down their debts far quicker than in previous years whilst building equity in their properties. Lower borrowing costs have also put money back in peoples’ pockets and canny individuals might be well served in retirement by saving the difference,” he added.
So what are the options for savers and investors?
With interest rates in the UK unlikely to rise this year, Lowcock said the outlook for cash savings looks “worse than ever” and interest rates offered on the best savings accounts could fall further.
“Equities continue to offer attractive yields for investors. Companies can also grow their dividends ahead of the rate of inflation which in turn would help drive share prices higher. Equities are an attractive long term investment for those looking to generate an income in retirement or to grow their investments, but do come with risk.”
He picked the Newton Real Return fund for investors as it focuses on preserving capital in order to grow. At its core, it consists of UK and international shares and corporate bonds and the fund also invests in cash, government bonds and derivatives. He also tipped the Fidelity Global Dividend fund which has about 50 holdings and is focused on large companies. Income is targeted to grow ahead of inflation and 25% greater than the MSCI All Country World Index.