When Will Interest Rates Rise?
Entrepreneurs need stable economic backdrops within the countries which they operate their businesses in. The recent scenario of interest rates holding at record levels has helped entrepreneurs because;
- It has created a stable backdrop.
- The cost of borrowing is competitive.
- A certainty exists, with the economy also providing stable exchange rates, low wage demands and regular prices.
But; When will interest rates rise? and why have they been at such a low level for so long?
To answer the question ‘when will they rise?’ is possibly better answered by understanding why they have been so low for so long. It was 5th March 2009 when they hit the 0.5% bank base rate in the UK. At the time of writing that is nearly 80 months or put succinctly for those borrowers, 80 monthly mortgage repayments.
This is not only a record low but also a period of consistency never before heralded in the UK. This consistency is the key. It is enabling, and there is a certainty that borrowing today is not likely to be cheaper tomorrow. So why not go out and borrow and create a business, buy some equipment or make a property investment.
So why are they so low? The reason being that there was so much household debt created in 2002 to 2008 that it takes years for this to unwind. It is easy to borrow £1000 it only takes a second but it needs £1000 of super earnings or profits to repay the amount borrowed.
The hangover of household debt from that time has been misunderstood and misreported. It must have been much more than at first thought. We can all remember that the lending criteria used was loose. That equity prevailed in most properties because of rising prices and during 2006 and 2007 it seemed certain that everything was geared for those prices to continue rising.
It was not until debtors defaulted in the US (in quite large numbers) that those market makers realised that the amounts lent had been far too much to far too weak a section of society that words were then being used and bandied around such as ‘credit crunch’, ‘toxic mortgage books’ and ‘crashes’.
The problems in mid 2008 were exposed. Many people had borrowed against their house to buy consumer items, not only extensions but items such as cars, and even holidays.
This debt needed to be repaid. The mortgage market took fright. They called in loans and realised they could not. The market contracted at such a rate that mortgage products reduced from say 20,000 available to under 100. Only ‘triple A’ borrowers could borrow. However now some 10 years on borrowers are still looking for deals to re-mortgage those existing debts from 2002-2007.
The Governor of the Bank of England stated that as soon as unemployment falls below 7% then that was a scenario by which rates could rise. It actually needs more than that. It needs
- a generation to sell their properties and downsize.
- house prices to correct and reduce
- some wage inflation
- fuller employment
Next week I will be discussing the common questions asked by investors. In the meantime, if you have any questions or wish to comment on this post then please do so below.