Following last week’s column, what are the chances of negative interest rates?
To make the best returns on our investments, we always need to be fleet of foot.
If we always do what we have always done, we will always get what we’ve always got.
Markets and economies have surprised as long as I can remember.
What is obvious does not always happen, which is the reason for having the very best managers for your pension/investment funds.
To give you an example, picture March 17th 2020. St Patrick ’s Day was all but cancelled in Ireland.
The UK was just coming to terms with Covid as a threat and at the entrance to the current Covid black hole.
Who, at this stage would be interested in buying shares in the second largest cinema chain in the world? – As in, social distancing is a tad tricky.
In less than three months, a £10,000 investment in that company – CineWorld would have returned a cosy £46,500. Make sense of that.
The key is to look ahead and ask what is possible, rather than what is ‘obvious’, and negative interest rates are more than possible.
The UK economy has fallen into its deepest recession on record. We also know unemployment is set to rise as employers use Covid as an excuse to release staff.
There are countless other downward pressures on the economy, which may well call for drastic economic stimuli.
Interest rates
Lending is tightening with credit restrictions, which will squeeze the housing market. House prices are an important contributor to confidence in the UK as the equity is seen as a buffer – a bank account as such. Whilst this is far from the truth, in a debt driven economy such as the UK, the perception of wealth in a property is fuel to that confidence, which motivates the consumer to spend.
The reason for the UK’s significant fall is likely to be blamed on Covid, but it is much more deep rooted than that.
The 20.4 per-cent fall in output is the largest in ANY of the world’s developing economies and is also the UK’s biggest quarterly fall.
Nearly three-quarters of a million jobs have gone and that is before this negative feedback loop gathers steam.
Being nimble however, other sides to the market have performed well.
Consider the change to eating from home. Just Eat reported a 44 per cent increase in revenue. Amazon’s attractiveness through E-commerce has meant that it needs more warehouses and is just taking up a 2.3m square foot building outside London.
There is no doubt a defibrillator is required and negative interest rates would potentially allow the scope for that injection.
The International Monetary Fund (IMF) stated clearly that severe recessions require between three to six percentage points cut in interest rates to stimulate the economy. When rates are nearly at zero, how is that possible? The answer is of course negative interest rates.
The IMF also stated they could bring in a system that would make ‘deep’ negative interest rates ‘a feasible option’ so for those thinking it’s a pipe dream, the plan is already there, and that plan is one without cash, as mentioned last week.
With such ‘interference’ comes greater power to the control on influencing spending and your general financial behavior.
One ‘stopper’ to this is bank lobbyists. They detest negative interest rates, as they believe it slashes their profits. So much so, the Federal Reserve in the USA took negative interest rates off the table in its 2019 review.
The belief is also that by dropping interest rates into negative territory, it forces the consumer to spend or invest which stimulates the economy further.
In reality that doesn’t happen, at least it hasn’t, and there is no evidence of it happening.
If not presented correctly, it confuses the consumer who then hoards the cash and indeed, in the absence of an interest rate and the potential to be charged for holding money in a bank, they ‘mattress it’.
Time will tell.
Our advisers are here to help you so please do get in touch. To contact our Northern Ireland office, call 028 6863 2692; our Cornwall office – 01872 222422 and you can reach our Southampton office on 023 8064 9674. If you prefer to email, please contact us on info@wwfp.net.
You can also join our social conversations on Twitter with Peter McGahan and Worldwide Financial Planning and you’ll find us on LinkedIN – Facebook and Instagram