Recent macro-economic factors and a new political landscape mean that long neglected savers will need to wait a long time for higher interest rates from central banks.
Since the 2008 financial crisis and the unprecedented reaction of central banks in rolling out zero-interest-rate-policies (ZIRP) and Quantitative Easing (QE), it has taken almost a decade for interest rates in the US, UK and Europe to even start to recover.
In the U.S, the ZIRP and QE policies ran between December 2008 and 2015. QE was often referred to as “printing money” but involved the Federal reserve buying bonds and holding them on its balance sheet. At one point, the Fed’s balance sheet stood at around $4.5 trillion which was 25% of the US GDP at the time (pre-crisis, the Fed’s balance sheet was around 6% of GDP). QE has now ended and the assets on the Fed’s balance sheet are being allowed to mature (with no rollover or repurchase).
On December 16, 2015 the Fed finally increased its key interest rate, the Federal Funds Rate, for the first time since June 2006. The hike was from the range 0.25% (effectively zero) to 0.5% and marked the first increase in interest rates by a major central bank since the 2008 crisis.
Janet Yellen then continued to raise US rates steadily during her term and her successor Jerome Powell continued to gradually hike rates a further four times during 2018. Even with these gradual increases, the Fed Funds rate still only stands at 2.5% which is still very low by historical standards.
However, this monetary tightening by the Fed has drawn criticism from the Whitehouse which is unprecedented in recent history.
Jerome Powell has been increasingly pressured by Trump both directly (usually via Twitter) on monetary policy and indirectly by the macroeconomic fallout from Trump’s trade war with China.
Even this week, the President continued this criticism saying that he has the power to replace the Fed Chair (his initial choice) and suggested the ECB’s Mario Draghi would do a better job.
Whether or not the Federal Open Market Committee (FOMC) is influenced by this pressure, the markets are now predicting a 0.25% rate cut in July with three additional rate cuts over the next twelve months.
The latest statement from the FOMC stated that “uncertainties about the outlook have increased” which mean they will be “closely monitoring the implications of incoming information… and will act as appropriate to sustain the expansion”. Where previously the U.S were the economy leading the return to normalized monetary policy, this now seems to be at a pause.
In Europe, the ECB formally ended their version of QE in Dec 2018 (with a balance sheet of €2.5 trillion) as part of its “normalization” plan. However, the global trade war has derailed these plans during 2019. Unlike the U.S, Eurozone interest rates have not recovered and have been held at zero since 2016 with no hike in site. Indeed, in one of his last speeches as ECB Chairman, Mario Draghi announced that interest rates cuts (negative rates) or a return of asset purchases (QE) may be required again for the Eurozone. This drew immediate Twitter criticism from Donald Trump who suggested this was currency manipulation by the ECB. Added to this uncertainty is the question of who Draghi’s successor at the ECB will be and how they will react to the ongoing uncertainty around Brexit.
In the U.K, Brexit uncertainty is the key macro factor which means we are unlikely to see any interest rises from the Bank of England (BoE) in the near future.
During a recent Treasury Select Committee hearing the BoE Governor Mark Carney reiterated the MPC is ready to provide some stimulus to the economy in the case of a no-deal Brexit. Earlier this year it was widely accepted that the BoE were holding back 25bps for this scenario. The six-month Brexit extension requested by the UK expires at the end of October and recent months have been dominated more by party-politics than workable solutions. Like Draghi at the ECB, Mark Carney will also end his BoE tenure soon and the search for his successor continues. While there are some hawkish voices on the MPC who suggest the need to increase rates to control inflation, the market is expecting the BoE to follow the dovish sentiment coming from the Fed and ECB.
The unfortunate conclusion is that savers can expect no immediate help from central banks faced with these macroeconomic and political pressures. It’s clear, savers need to look further than their current providers to make their money work smarter.
Lastly, those investors and savers pushed up the risk curve into Neil Woodford-type funds in search of a meaningful yield are also now counting the cost.
Provided for informational purposes only. Not designed as advice. Speak to your IFA or tax advisor for advice tailored to your individual circumstances. Tax treatment depends on your individual circumstances and may be subject to change.
SynerGIS is a trading name of Global Investment Strategy UK Ltd (GIS).
You risk losing your capital should GIS become insolvent