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Why you shouldn't worry about the threat of higher interest rates

(Dan Kitwood/Getty Images)
(Dan Kitwood/Getty Images)

We have never had it so good with interest rates, have we? Yes, average borrowing levels are high, but if you are in the mainstream banking sector your at-the-margin interest rate challenges are nothing compared to what I could see my parents’ generation struggling with in the 1970s and 1980s.

And that – along with a rampant immediacy consumerism – is why people have borrowed more.

The talk of the town in financial markets are higher interest rates. Some of you who are big savers or are living off your savings are probably quite excited by that news, but of course those who tend to borrow more will be far less so. Typically for the overall economy, higher interest rates are a bad thing – which is why the period of relative economic performance malaise over the last decade has been associated with ultra-low interest rates.

MORE: Interest rates will not rise until 2019, but pound will continue decline

The start of any higher interest rate epoch though typically commences with an uptick in inflation.

Thanks to the pound’s plunge in the aftermath of the Brexit vote, UK inflation is currently among the highest in the grouping of advanced economies in the world. Logic would dictate then that the Bank of England is in a panic mode and itching to raise interest rates – even if it is just reversing the cuts applied in the months after the Brexit vote. And at a time of general uncertainty about the direction of the UK economy this would not be good news.

And this is why UK interest rates are not going up sharply any time soon. You only need to look at dull wage increases and lacklustre economic growth levels to know that as the pound laps those easy comparatives the high inflation numbers will progressively drop out. The Bank of England may well choose to edge up interest rates over the next year but essentially they will go from ultra-low to just very low.

MORE: The chart that shows the pound is at a 50-year low

So happy days then if you are a borrower or prefer to see the UK economy growing faster? Maybe at the margin, but it hides two bigger issues. First, low historic rates suggest an economy that is far from firing on all cylinders. The second is if you are worrying about base interest rates of a couple of percent then you have far too high borrowings relative to your income.

An old adage in the stock market is that ‘if holding a particular share is keeping you up at night, you should sell it’. Over my career this has only happened once – and it did feel so much better to have sold that particular troublesome stock. In the personal finance space the equivalent insight would apply to high borrowing rates. If you fall into this camp, you should acknowledge your lucky stars that we live in a different time to the 1970s or 1980s where rates ratcheted up with much greater magnitude and volatility resulting in negative equity. Accumulated high debt in any case is generally always the biggest killer to building your net worth over time.

Now if only governments around the world could think similarly.

Chris Bailey has over 20 years of investment industry experience at long-only and long-short institutions as a global multi-asset fund manager, strategist/macro thinker and, in the earlier part of his career, as a securities and fund analyst.

In 2013 he founded Financial Orbit focusing on daily macroeconomic comment and securities analysis. In December 2016 his Twitter account (@financial_orbit) was named as one of the ’50 accounts investors should follow in 2017’.

The content on this page does not constitute financial advice and is provided for general information purposes only. Nothing on this page should be regarded as an offer to conduct investment business or to buy/sell any investments.

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