Interest rates – Where are they going?


“In the lead up to The Global Group UK Investor Show next month, the good folks at UK Investor have asked my opinion on interest rates.

Where are they going?

In many ways it’s the biggest question in investing: what is the future price of money going to be?

Policy makers are caught between a very big rock and a very hard place.

Official UK inflation stands at 8.5%. It’s higher if you use the traditional RPI. But real inflation is much higher. Official measures only look at the price of goods which are mostly prone to the deflationary forces of increased productivity. If you include things like house prices and financial assets inflation is much much higher.

Looking at another way, money is losing value at over 10% per year. The same salary in a year’s time will effectively be 10% lower . The purchasing power of your savings will be 10% lower. The already extraordinarily large inequality gap between asset owners (the rich, the old) and everyone else (the young) will be 10% bigger.

Any responsible central bank, whose core remit is to keep a lid on inflation, would “do a Volker” and hike up rates until this messy situation is under control.

But they can’t. There is too much debt in the system. If rates were put up to a level that reflected actual inflation – ie north of 10% – the housing market would collapse, stock markets would collapse, the bond markets would collapse and government’s own debt servicing costs would go bananas.

So they will make a lot of noise, edge rates up by ¼% here and ½% there and hope this unfortunate inflationary episode goes away.

Good luck with that.”

Hear more from Dominic Frisby at the Show in May, secure your complimentary standard ticket using code FREE500EM.