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AMDK declared High Interest Rate Era is back
- Thread starter k1976
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In the wake of the Bank of England’s surprise bumper interest rate hike Thursday, it’s been “mortgages this” and “mortgages that” all morning.
I think it’s time for a bit of perspective. Let’s take a step back.
Here’s a chart of the Bank of England base rate going back to 1953. That’s 70 years’ worth of data. What strikes you about this chart?
I think it’s time for a bit of perspective. Let’s take a step back.
Here’s a chart of the Bank of England base rate going back to 1953. That’s 70 years’ worth of data. What strikes you about this chart?
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Higher Interest Rates Are Here To Stay
What we’ve experienced for the last 15 years was anything but normal.
Ah, remember stability?
Photographer: Samuel Corum/Bloomberg
By
John Stepek
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23 June 2023 at 20:32 GMT+8
Welcome to Money Distilled. I’m John Stepek. Every week day I look at the biggest stories in markets and economics, and explain what it all means for your money.
It’s time for a bit of long-term perspective
Looking for a bit of cheerier news? Don’t miss the latest Merryn Talks Money podcast. Merryn has a chat with fund manager Gervais Williams of Premier Miton Investors about why he thinks smaller UK companies are at the start of a very long bull market. He also highlights a lot of names he’s particularly keen on, so make sure you give it a listen.In the wake of the Bank of England’s surprise bumper interest rate hike Thursday, it’s been “mortgages this” and “mortgages that” all morning.
I think it’s time for a bit of perspective. Let’s take a step back.
Here’s a chart of the Bank of England base rate going back to 1953. That’s 70 years’ worth of data. What strikes you about this chart?
The thing that strikes me most is that the last 15 years have been very, very unusual.
Don’t get me wrong. There’s a lot of ups and downs in this chart. The 1970s and 1980s are pretty spiky and weird too.
But you couldn’t describe the last 15 years as “normal.” In the last 70 years, the first time the Bank of England rate got below 3% was in 2008. The average base rate was around 6%.
Now let’s have a look at the relationship with inflation over time. Below is the same chart, but with annual inflation (as measured by the good old-fashioned retail price index — RPI) added to the chart in dark blue, versus the Bank rate in white.
The lower panel, meanwhile, shows the difference between the Bank rate and the inflation rate. When the bars are in negative territory, inflation is above Bank rate.
Other than during periods of extreme inflation (the 1970s) or extreme deflationary pressure (the 2010s), Bank rate has typically been higher than inflation.
In fact, when you average it out over the 70 years, Bank rate has generally been almost one percentage point (0.84 to be more precise) above inflation during that period.
In fact, when you average it out over the 70 years, Bank rate has generally been almost one percentage point (0.84 to be more precise) above inflation during that period.
Don’t Bet On A Return To Zero Rates
“Fine,” you’re thinking. “Show off your fancy terminal skills. But what does it actually mean for me?”
I’m glad you asked. First, I want to emphasise what I’m not saying: I’m not saying that Bank rate rising to this level is no big deal.
As residential property analyst Neal Hudson of BuiltPlace has pointed out many times, mortgage rates of 6% today are equivalent to the burden relative to income that homeowners saw when interest rates hit double-digits in the early 1990s.
The pain is real, and the good news — such as it is — is that the labour market is still strong. And the fact that so many homeowners are still on fixed rates means they have more time to prepare (in the 1990s, most people were on variable rates so got hammered right away).
So I’m not dismissing the pain of rates at these levels. What I am saying, however, is that we should try to get used to rates being around these levels for the foreseeable future — as in decades, not years.
That’s because, even before the pandemic, we were edging back to normality, following the 2008 financial crisis. That recession ravaged the global banking system, which then spent about a decade in convalescence. This is — believe it or not — not unusual for such crises. The big difference in 2008 is that it was global rather than local.
In any case, if you can recall, central banks, led by the Federal Reserve, tentatively started raising interest rates in 2017 and 2018. That was the beginning of the post-crisis “normalisation” process.
We then got the pandemic, which saw the authorities going into overdrive both to protect a financial system (that likely did need some shielding) and to keep people inside their homes.
As a result, we got rampant inflation, rather than more “normal” price pressure. And a lot of this is still feeding through. You can’t just flick a switch to turn the global economy on and off again without getting a lot of bottlenecks in the restart process.
The big risk now — in my eyes — is that the Bank of England over-reacts in its haste to redeem itself, and causes more pain and volatility than is necessary in order to pull inflation back, at a time when we are already likely past the worst of it.
But even if we do get a recession, we’re not going back to the deflationary 2010s. You’ll note that although we saw several recessions in the UK between 1953 and 2007, there’s not been a single one in which interest rates were slashed to near 0%.
In short, don’t fall for recency bias. Accept and get used to higher interest rates being here to stay. For want of a better phrase, this is the “new normal.”
“Fine,” you’re thinking. “Show off your fancy terminal skills. But what does it actually mean for me?”
I’m glad you asked. First, I want to emphasise what I’m not saying: I’m not saying that Bank rate rising to this level is no big deal.
As residential property analyst Neal Hudson of BuiltPlace has pointed out many times, mortgage rates of 6% today are equivalent to the burden relative to income that homeowners saw when interest rates hit double-digits in the early 1990s.
The pain is real, and the good news — such as it is — is that the labour market is still strong. And the fact that so many homeowners are still on fixed rates means they have more time to prepare (in the 1990s, most people were on variable rates so got hammered right away).
So I’m not dismissing the pain of rates at these levels. What I am saying, however, is that we should try to get used to rates being around these levels for the foreseeable future — as in decades, not years.
That’s because, even before the pandemic, we were edging back to normality, following the 2008 financial crisis. That recession ravaged the global banking system, which then spent about a decade in convalescence. This is — believe it or not — not unusual for such crises. The big difference in 2008 is that it was global rather than local.
In any case, if you can recall, central banks, led by the Federal Reserve, tentatively started raising interest rates in 2017 and 2018. That was the beginning of the post-crisis “normalisation” process.
We then got the pandemic, which saw the authorities going into overdrive both to protect a financial system (that likely did need some shielding) and to keep people inside their homes.
As a result, we got rampant inflation, rather than more “normal” price pressure. And a lot of this is still feeding through. You can’t just flick a switch to turn the global economy on and off again without getting a lot of bottlenecks in the restart process.
The big risk now — in my eyes — is that the Bank of England over-reacts in its haste to redeem itself, and causes more pain and volatility than is necessary in order to pull inflation back, at a time when we are already likely past the worst of it.
But even if we do get a recession, we’re not going back to the deflationary 2010s. You’ll note that although we saw several recessions in the UK between 1953 and 2007, there’s not been a single one in which interest rates were slashed to near 0%.
In short, don’t fall for recency bias. Accept and get used to higher interest rates being here to stay. For want of a better phrase, this is the “new normal.”
I prefer the turkiye and japanese experiment with low interest rates.
Yeah.... Lira last few years is jin good de
money flow to Western bank and stock market?Western countries raise interest rates.
Tiongland keeps interest rates low.
Guess to where the money will flow?
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