A week of interest rate freezes. On Wednesday the US Federal Reserve gave “strong, powerful guidance” that it would keep interest rates at or around 0%pa at least until the end of 2023 i.e. no rate increases until 2024. That’s over 3 years away!
In the UK yesterday (Thursday), the Bank of England confirmed interest rates were to remain at 0.1%pa for now as inflation had fallen to 0.2%pa and that it is still targeting an inflation ‘trend growth’ rate of 2%pa.
The UK appears to following the US lead and we suspect they both have the same agenda, so whilst the Bank of England has not been as specific as the Federal Reserve in setting a benchmark on interest rates and inflation until 2024, we suggest the UK could cut rates to negative next month to try and stimulate the economy and this could be in place for some time as we wrestle with both the pandemic and Brexit.
What does negative interest rates mean?
It means 'high street' banks will be ‘credited’ interest on Bank of England borrowing i.e. high street banks will be paid interest to borrow money from the Bank of England.
This is designed to encourage banks to borrow more money from the Bank of England to then lend more money cheapy to consumers and businesses. The knock on effect that mortgages just might get cheaper - guess what will happen to property values after any 2021 falls?
Gross domestic product (GDP) is expected to fall globally by 4-5% in 2020 and 2021 looks just as bad although not as low as predicted in June 2020. We expect interest rates in the UK to go negative and remain negative or low for a similar period to that of the US.
Knock on effect:
Inflation is the driver. Governments need inflation to devalue government debt see this week’s video Governments Want Inflation so Invest With An Inflation Hedge.
Cheaper borrowing, more money ‘sloshing’ around in the economy will stimulate growth and will drive activity and prices up. Long term this means consumer prices up, wages up, property values up - i.e. inflation.