Low interest rates – the lull before the storm!

It seems that some members of the Bank of England’s Monetary Policy Committee have broken the previous unanimity and are beginning to argue for a rise in interest rates sooner rather than later.

Most recently, Kristin Forbes, MPC member and MIT professor, has warned that leaving it too late could depress the current economic recovery because of the time lag between introduction and its effect feeding through into the economy.

In our view interest rate rises are unlikely to rise in the medium term because the MPC are aware of the storm when they do.

In terms of the interest rates being paid by SMEs, these are unlikely to rise much because SMEs are already paying huge premiums, often more than 10%. This has enabled the banks to restore their balance sheets, which has been the real concern for the MPC and government.

For small businesses considering growth plans, financed by borrowing, the preferred option for a while has been to look to online lending platforms.
Nevertheless, keeping an eye on consumer spending and cash flow to ensure business is

healthy enough to provide some room for manoeuvre may become more important for SMEs.

Where an interest rate rise will really impact is on consumers, many of whom still have unrealistic levels of personal debt. Most home owners are benefitting from the expiry of fixed interest rate mortgages that automatically switched onto low variable rates because they are pegged to the Bank rate. While servicing such mortgages, many still paying interest only, may currently seem easy, an increase of 0.5% will double interest payments for many. So much for historical rates above 5% a tenfold increase in payments for many.

The potential impact on consumers is being exacerbated by the current spending on capital goods such as new cars. Most new cars are bought on tick where the low cost of finance packages is helping drive the huge growth in sales.

The unprecedented period of low interest rates at 0.5% since March 2009 has lulled most consumers into believing they are the norm. Not that anyone likes unpleasant predictions but we believe it is a lull before the storm, a bigger one than any of us want to confront. At least it will develop slowly as rate setters and governments try to protect consumers from the reality of debt – debt has to be repaid even if this can be put off for the moment.

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