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0.25% Interest Rates - Is that really such a good idea?

 

Posted on 4 August 2016

The Bank of England has today announced a cut in bank rate to 0.25%, the lowest on record and the first change since 2009.

This was teamed with other measures, including a further £60bn of quantitative easing in the form of buying UK government bonds, and a scheme to encourage banks to pass on low-rate loans to businesses and individuals to stimulate the economy.

Of course the idea is that low rates encourage borrowing and investment by companies and individuals - but many now questioning whether the sensitivity of corporates and individuals has already been dulled by years of historically low rates (0.5% since 2009), and whether the underlying message from the government that the economy is “in trouble” over-rides any appetite to borrow more debt and invest for the future.

In fact, some argue that lower rates push savers to save more because when the return on their savings reduces they’re inclined to save more in order that they still end up with the same savings value they sought to create before the rate cut.

As for corporates, it could be argued that low rates protect inefficient business and that, because they haven’t “gone under”, this creates over-supply in the market, averaging everything down and preventing investment by stronger businesses. Add to that the underlying message that these radical central government intervention measures are required to stabilise the economy and you’d be forgiven for assuming it wasn’t safe time to invest!

Clearly there are arguments in both camps but what’s certain is that Central Bankers had a very difficult decision to make, and must feel as if they’re between a rock and some other equally hard place. It’s a bit like administering a drug that you know has side effects and balancing up whether the improvement in the core ailment results in a net better, or net worse, position.

I suspect the economy was heading this way before Brexit and, in our experience, there’s been little or no Brexit impact on transactions we’re handling. That said, it must be acknowledged that it’s a mixed bag - whilst some sectors are undoubtedly suffering from the fall in value of the £, others such as the hospitality industry are booming with high double-digit bookings increases as tourists flood into the UK and an extra 10% of the UK population holiday on British soil. We also believe UK assets will become still more attractive to overseas buyers - and not just mega deals like Soft Bank’s acquisition of ARM last week, but small and medium enterprises too.

We don’t subscribe to the Armageddon views of some and believe that, if the UK (companies and individuals) can look beyond the near term gyrations that we knew would result in the short term following the referendum, there’s a very positive future.

Anyway, time will tell.

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