View more on these topics

Investment view

Is the era of cheap money coming to an end? If it is, then you cannot say you were not warned. The world and his wife were anticipating a quarter-point increase from the monetary policy committee last week. They were not disappointed. The Bank of England delivered according to expectations. Equally unsurprisingly, mortgage lenders were quick to follow suit. The real question is, where do interest rates go from here?

The level of interest rates is not just about how much your mortgage costs. Savers depend upon deposit interest. Indeed, the bear market of 2000 to 2003 has probably resulted in more money finding its way into deposit accounts than might otherwise have been the case. The level of interest rates will also impinge upon annuity rates and thus funding requirements for pension funds. Borrowers are not the only people affected when interest rates change.

Although we had double-digit interest rates a dozen years ago, the reality is that we have adjusted to cheaper money very quickly. The really attractive rates, for borrowers, that is, were around a year or so ago.

In the dying days of the equity bear market, not only were short-term interest rates low but long-term rates had also taken a dive as money poured into Government stocks. Indeed, you could argue that the brief restoration of the yield gap, when the yield on equities rose above that on gilts, marked the end of that bear market.

How high could rates go in this country? It depends on which particular concern is driving the MPC at the time. If it is our competitive position in the export market, then rates may not rise very far from here. Already, sterling is strong against both the dollar and the euro so pushing them up to the point where we are more than double the European level and four times that in America can only serve to exacerbate the situation. Exchange rates are, of course, a concern but the housing market and the British propensity to borrow are probably the real drivers.

Data out last week on house prices suggested that bricks and mortar are still delivering sterling returns. Indeed, the Halifax reported that January&#39s rise was a whopping 2.2 per cent – the biggest monthly advance in house prices since 2002. Even the Financial Times House Price index, which endeavours to take account of all house price movements, not just those funded by a mortgage (which is the case with the Halifax and the Nationwide indices) indicated that house prices were 13 per cent higher at the end of January than they were a year previously. To dampen down this sort of rise could result in interest rates rising by perhaps as much as another 1.5 per cent. That really would have an effect.

It would be difficult to justify such a move based upon inflationary pressures alone but the reality is that the housing market had already priced in last week&#39s quarter-point rise. Even a further half point may not be enough to cool the ardour for borrowing against the value of a rapidly appreciating asset. That is the concern that markets should have. Rate rises of this magnitude will impinge elsewhere in the economic recovery. It is not only housebuyers and consumers that borrow. Businesses do, too.

Will the level of overseas interest rates have much effect? In Europe, which arguably is more important to us here, there seems little prospect of rates rising. Indeed, some muttering about a possible ECB cut to keep the tentative economic recovery in Germany and France from stalling has been heard. In America, on the other hand, where economic growth now seems back on track, the era of very cheap money may soon come to an end. At the very least, the Federal Reserve Bank has called the bottom. Quite how far rates will rebound from their present 1 per cent is debatable, though.

We have seen the turn in interest rates in this country. What we do not yet know is the extent of the retracement that will take place and the effect it may have on the wider economy. The MPC minutes, when they are published, will give us more of a clue.

Perhaps the MPC really is concerned that the consumer price index, presently languishing at 1.3 per cent against a target of 2 per cent, could be on the way up as far away as two years time. But for my money, it is the housing market that is providing the real concern. Rates may have a way further to go yet.


Life offices look for more incentives

Product providers have given their approval of the plans to encourage staff to join occupational pension schemes but several life offices are calling for the DWP to do more now to encourage saving. Scottish Widows says it is disappointed there is nothing from the DWP that deals with the issue of the disincentive to save […]

Baronsmead VCT 4 reports good progress as it moves towards £30m

Baronsmead VCT 4 plc, managed by ISIS Equity Partners, has announced its results for the year ended 30 November 2003 with a total return for the year increasing by 5.3 per cent based on total dividends for the year of 2.2p per share and an increase in the net asset value per share increasing from […]

ABI and actuaries split over advice in the workplace

The ABI and the Association of Consulting Actuaries have taken opposing positions on the Department for Work and Pensions&#39 Informed Choices proposals for workplace pension information. The ABI welcomes the drive to improve the knowledge of the millions of people believed to be saving nothing or to little for their retirement. But the ACA is […]

L&G launches free medical advice line

Legal & General is offering its customers free medical advice. The L& G healthcare arm has set up a confidential medical advice line for customers that will provide them with a telephone consultation with a qualified doctor.

Trusts and Taxations

Take a look at the trusts and trustee taxation video – The definition and classification of trusts. Once you’ve viewed the boxset, visit our Test Centre to test your learning and get your CPD certificate. View here


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers. Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and thought leadership.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm