Would UK Interest rates staying low until 2014 be a good thing for investors?
Brett Alegre-WoodChairman, YPC Group
Hey guys,
The latest report from Ernst & Young's Item Club reports that UK interest rates will have to remain at their record low level for the next four years.
Would long term low interest rates really be good for investors?
At first thought, such a freeze would be welcomed by borrowers, who will enjoy lower mortgage and other loan repayments, but would be bad news for anyone who relies on an income from savings.
The low interest rates, it argues will be necessary to counterbalance low inflation as the Government's spending cuts come into force.
Andrew Goodwin, senior economic advisor to the Item Club, told Sky News: 'The VAT rise will keep inflation rates high in the short term, but come 2012 I would expect inflation to be well below the 2% target.'
Ernst & Young's Item club believes this will happen as the effects of VAT and high energy prices wear off - and spare capacity in the economy affects companies pricing decisions and employees' wages.
This prediction does contradict the view in the City and at the Office for Budget Responsibility (OBR) that interest rates will start to rise next year.
Pressure for an early interest rate rise increased last week after GDP was estimated to have grown at 1.1% in the Q2 2010.
What does it mean for investors?
BUT; what does it all mean for investors, certainly low interest rates is a good thing for investors.
Well not quite, you see while we have low interest rates due to depressed GDP the economy won't see full recovery, businesses won't want to invest in the future, they won't employ more staff, they will effectively be in 'defence' mode.
So at some point we want GDP to increase, slowly and gently, this will then mean rates have to rise but at least the economy will get back on its feet.
It's almost a case of having to go through some pain, either a dull and long term pain, which will see house prices remain subdued, lending subdued and the market subdued, or a shorter, sharper pain.
The problem may be through that if we take too long the dull pain becomes a permanent fixture for the next generation, or too quick the pain is too great and we dip again.
Cash flow is still king...
It's a quandary for which that no-one has the exact answer! My money is on slow and steady way out rates will rise next year but not too fast. This is why you must make sure you are putting aside the extra cash flow now in order to be ready should interest rates kick off in 2011/2012.
Call the team on 0207 812 1255 and they can talk you through all the changes that affect your portfolio. It's important to get the full information as they media is already starting to have a field day.
Live with passion,
Brett Alegre-Wood
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