There’s been lots of talk about when the Bank of England will start hiking interest rates. Ignore it. The first rate hike is even further away as ever.
Last month, I warned that interest rates could stick at today’s 0.5% for a decade.
At the time, markets were pricing in the first base rate hike for February 2015. They have now come round to my way of thinking, pushing back the first expected rate hike to 2016.
I still think that’s way too soon.
I Won’t Say I Told You So
If you filter out all the noise, it is hard to see where the first base rate hike is coming from. Even if I’m wrong and rates do nudge upwards, they won’t go far. Low interest rates aren’t a passing phenomenon. They could be forever.
Ben Broadbent, deputy governor for monetary policy at the Bank of England, has more or less admitted that.
He says the underlying rate of inflation has been “driven down remorselessly”, and the process started well before the financial crisis.
Contributing factors include the ageing global population (older people are more cautious with their money) and widening income inequality (the rich save more of their wealth).
Broadbent suggested rates could stay low. Permanently.
The Lowdown On Low Rates
It has already happened in Japan, where rates have been close to zero for two decades. Now the rest of the world looks set to follow.
The disastrous single currency has locked the eurozone into deflation.
China is flooding the world with cheap products to keep its export boom going, forcing downprices everywhere.
Wages are flat. Food prices are falling. Oil is plunging.
In the UK, Barclays, HSBC, Lloyds and Nationwide have all launched their lowest ever mortgage rates in the last few days.
Just when you thought money couldn’t get cheaper, it does. And savings rates only get worse.
Saving Grace
The UK can’t afford higher rates, with government debt growing at £100 billion a year. Nor can Europe, Japan or China. Even in the buoyant US, the hawks at the Federal Reserve are turning unexpectedly dovish.
Savers can scream at the injustice of it, but it won’t help.
Big Dividend
The big surprise to me is that company dividends have held up so well.
Oil giants BP and Royal Dutch Shell, British Gas owner Centrica, pharmaceutical company GlaxoSmithKline, and supermarkets Morrisons and J Sainsbury, all yield more than 5%.
Better still, low interest rates should underpin stock markets, by attracting savers desperate for a better return on their money.
The longer interest rates stay low, the more attractive company dividends will look.