The effect of low interest rates
What are the benefits of low interest rates?
As far as I can tell, it allows governments to raise money and pay a lower rate of interest to investors. In my opinion this is pretty meaningless, as at the moment governments are only paying back their debts by issuing more bonds. So in essence, does it really matter what the rates are?
One beneficiary of lower interest rates in the UK, is the home owner who has a mortgage.
As the banks are not lending to businesses, it really doesn’t matter what level interest rates are and indeed, those companies who are desperate for finance are having to pay over the odds to raise money from the private sector anyway.
So where does this money come from?
It comes from the tax payer, consumer, corporation tax payer amongst others. Simplistically, if I have £100K on deposit at the bank returning what amounts to 1 or 2% net, I earn about £2K and the taxman earns circa £1400
I’m not really jumping about with joy, or thinking about whether I should fit a new kitchen at my home, buy a new BMW or go on holiday.
What does concern me, is that my income taxes are the same, my children’s school fees are going up, my fuel fills are rising, my indirect taxation costs are rising (VAT) and my health costs are rising. If I haven’t got a mortgage then I don’t see the benefit of lower rates either.
So what does this mean? Well, I have to budget. Budgeting is something that governments worldwide are being educated about, even as I write.
Budgeting means I spend less in the shops, on the beleaguered UK high street, I go out less (restaurants, entertainment leisure), I trim my food bill down at the supermarket, I tell my wife to highlight her own hair and I start growing long hair and a beard.
Apart from looking like a cave man, what does this now mean? Less money flowing into the economy, resulting in less job creation. Less taxation revenue for the government, resulting in even more austerity measures. Less money for corporate UK, slowing sales growth, less for directors, employees, pension funds, the taxman.Resultant falling share prices contribute to the ever increasing downward spiral.
What if interest rates are higher and my returns are nearer 6 or 7%? net. Common sense tells me I’ve got more money to spend, about £6K, thus stimulating growth. I pay all my bills, the government gets a bigger tax take also (about £4K) and UK corporate benefits etc etc.
More importantly, every pensioner in the UK is suffering with low interest rates, having to rebuild their capital base, as health costs are spiralling upwards and pensions are reducing. This is making it harder for pensioners to support or financially aid their offspring.
So are low interest rate benefitting the economy?
- Protect yourself against the expected interest rate rise (confused.com)
- Interest rates remain at record low (confused.com)