If rates don’t go up this year, they may never rise again

It is unlikely anyone will bake a cake or throw a party. The only people celebrating are likely to be those who took out huge mortgages on tracker deals before the financial crash of 2008. But this week, near-zero interest rates marked their sixth birthday.

It was in March 2009 that the Bank of England cut rates to the lowest levels since it was founded in 1694. The decision was presented as an ’emergency measure’ – and at the time it certainly looked as if the economy was about to fall over a cliff.

Half the banking system had collapsed. Trade had ground to a halt. GDP was shrinking at the fastest pace since the 1930s. Slashing rates to almost nothing, along with quantitative easing (QE), looked a sensible, if radical, response to an unprecedented downturn. It was an emergency that called for extraordinary measures.

A very long emergency

But six years is a long time for an emergency to go on. Even World War II was over faster than that. The trouble is, while QE is now consigned to the past – it is several years since the Bank printed any more money – near-zero rates are still with us. Not only is it now six years since there has been any movement in rates at all, it is even longer since we last saw a hike.

That was all the way back in July 2007, when they went up to 5.75%. If you work in banking, you can be eight years into your career without ever having seen a rate rise. Without anyone exactly explaining why, near-zero rates have become the new normal.

The question now is whether it will ever be possible to raise them again. And the answer? Probably not. It looks as if near-zero rates have been hard-wired into the economy. With every year that passes, the chances they will ever go up again gets smaller.

Take commercial loans. In the last five years, 760,000 new small businesses have been started, out of a total of 5.2 million in the country, according to a recent report by Lord Young. In effect, around 15% of small businesses have been started with interest rates that are close to zero.

Have those entrepreneurs factored in the possibility that rates might one day go back to 4% or 5%? Probably not. When they drew up their business plans they probably assumed rates would be at the low levels they are now.

We couldn’t stomach a rate rise

Even more mortgages will have been taken out since 2009. According to the Office for National Statistics, the average time that people have been in their home is eight years, and for owner-occupiers it is 11 years. On that reckoning, around half of home owners will have moved house since rates were cut to 0.5%, and probably taken out a fresh loan at the same time.

Put simply, their mortgage will have been arranged at these very low levels. The other half will have got used to paying far less interest than before the crisis.

No doubt their lender sent them some leaflets warning them to make sure they could afford a rate rise. But the truth is, as we all know from personal experience, your spending adjusts very quickly to your level of income. The average person has long since got used to low debt repayments.

As for overdrafts, or credit-card debts, they get turned over very quickly. Just about all consumer debt will have been taken out since rates were slashed – and although the interest charged is a lot more than the Bank of England rate, it is still ultimately linked to it. In effect, the vast bulk of borrowing now outstanding will have been taken out since the “emergency” began.

From the other side of the equation, savers have adjusted as well. The days when you could get any kind of decent return just by saving money in the bank are fading into distant memory. But people aren’t stupid, and the one thing we know about markets is that they can adjust to anything if you give them time. In the last six years an alternative finance industry has grown up that offers savers a far better return on their cash.

Money has poured into peer-to-peer lending, buy-to-let properties, crowd-funding, corporate bonds and equities, where savers can get some sort or return – certainly much more than they get from the bank. Some of that is because technology has opened up new possibilities. But a large part of the explanation is that money is searching out a home with a decent yield – and in many cases has found it.

The MPC’s last chance

The City still speculates endlessly about when we will see the first rise in rates. Members of the Monetary Policy Committee (MPC) pop up to tell us it might come in the autumn, or perhaps early in 2016.

Mark Carney assures us rates will rise one day. He probably even believes that himself. Yet the Bank of Japan cut rates close to zero back in 1995, and that is now two decades ago. They are no closer to going up now than they were then, and probably less so.

Just as in Japan, we may eventually just get used to near-zero rates. The Bank could have hiked last spring when the economy started recovering. But it flunked it, and if it doesn’t make any move before the seventh birthday rolls around, it may well be too late. Near-zero rates will be here permanently.

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