Bank of England raised interest rates for the first time in ten years
President Trump announces Jerome Powell as his choice to lead the U.S. Federal Reserve
Most investors outside the US Dollar and Euro see gold prices climb after busy week of central bank news
Inflationnow at five-year high of 3%
Inflation, low-interest rate, debt crises and bail-ins still threaten savers and pensioners
This week has been a significant week for central banks. The Bank of England raised interest rates for the first time in ten years, the Federal Reserve indicated that a December rate hike may happen and President Trump named Powell as his choice for leader of the Federal Reserve.
Gold reacted positively to Trump’s announcement as markets see little change ahead with a Powell-led Federal Reserve.
The interest rate decision is arguably the most interesting at present. Announcements on both sides of the pond suggest that the age of easy money is coming to an end, albeit slowly.
Since the financial crisiscentral banks have flooded markets with easy money,kept interest rates near zero and bought trillions of dollars in government and corporate bonds. Now most central banks (excluding Japan) have indicated that the party must soon stop.
The problem is, no one is sure how economies will cope when the moreish juice of central bank assistance will be taken away. None of the financial centres have managed to meet inflation targets which they were all so vocal about. Instead, they are suddenly aware that the encouraged financial excesses of the last ten years may well lead to another crash and something must be done to curb their enthusiasm.
Adding to the uncertainty is the issue that three of the world’s four most important central bank chiefs are nearing the end of their terms and may be well replaced. The jump in the gold price and fall in the dollar is just the first indication with how markets feel about such changes.
But is the age of easy money really coming to an end and are interest rate hikes a sign that central bankers have confidence in the economic recovery? Yesterday’s drop in the pound suggests markets aren’t buying it. They weren’t helped by Mark Carney’s dovish comments regarding the UK’s post-Brexit future.
All in all, anyone hoping they might finally earn some interest on their savings, see a slowdown in the devaluation of their wealth or a reduction in the counterparty risk their cash is exposed to, needs to think again. The UK along with the rest of the world remain very vulnerable and will take investors along for the ride.
A whole new world with little hope
Here in the UK a whole generation of homeowners are waking up to a world where interest rate rises can really happen. There are 8 million homeowners, many of whom will have bought in the last ten years and as a result have never experienced a rate rise in their adult lives.
Bloomberg explained how much the world has changed since the Bank of England last increased interest rates:
The world wasdrastically differentthe last time the Bank of England hiked interest rates:the iPhone was less than a week old;Gordon Brown was Prime Minister; the average price of a home in London was 261,000 (it’s now470,632).
In interest rate terms how much has changed? Very little. The rise merely cancels out the cut that happened following the Brexit referendum.
It’s likelythe hike in interest rate could do more harm than good. Previously savers, pensioners and investors suffered as a result of (arguably) negative real interest rates. Now the rate hike makes little difference to their current situation but propels debtors into further issues.
Those on variable mortgages will be facing rate hikes whilst the millions who have personal, unsecured loans will also be facing increased payments. All to contend with against a backdrop of rising inflation, pressure on wages and a slowing economy.
No change, nothing to see here
A decade of damage by easy monetary policy has caused unforeseen dama