Will interest rates stay low forever?

It has been more than seven years since interest rates hit rock-bottom, and the consensus view following last week's cut to 0.25% is that the general direction of travel has now changed to "lower forever" as opposed to "lower for longer".

Experts are predicting a further cut before the year is out. One such commentator is Azad Zangana, senior economist at Schroders, who has pencilled in a reduction to 0.1% in November.

A backdrop of anaemic growth is the main reason why rates may have to stay low. The theory is low interest rates help stimulate the economy and encourage consumers to loosen their purse strings.

According to Zangana, "concerns over the UK's exit from the European Union appear to have hit household and business confidence", which in turn forced the Bank of England's hand to cut rates last week.

Slowdown in growth

Zangana adds the monetary policy committee are placing more weight on the expected slowdown in growth, rather than the predicted rise in inflation.

"It believes that the currency effect on inflation will be short-lived, while the implications from slower growth could be more powerful over the medium term," says Zangana.

But even the more bearish economist cannot foresee a scenario of negative interest rates hitting the UK shores, particularly when Bank of England governor Mark Carney has warned against such a move.

Experts, however, have been wrong-footed in the past when it comes to forecasting future interest rate movements, with various economists predicting an interest rate rise in 2011 that failed to materialise.

'A combined programme of monetary and fiscal stimulus is required to avoid recession'This time around, according to Martin Cholwill, manager of Royal London UK Equity Income fund, the way the market is currently behaving suggests that rates could remain at their lows "for a number of decades".

"Rather than make predictions I try to read the market, and when you have companies like Vodafone issuing a 30-year bond that pays just over 3%, the market is telling you that interest rates will remain at their lows for the foreseeable future.

"The way the 10-year gilt yield has moved over the past week is another sign (falling from 0.8% to 0.6%)."

Tom Stevenson, investment director for personal investing at Fidelity International, agrees that "lower for longer" is looking worryingly like "lower forever".

"It's clear that the Bank of England is once again following the financial crisis template: making liquidity readily available, easing monetary policy and looking through the risk of exchange-rate fuelled inflation. But it is also becoming clear that the Bank cannot act alone," says Stevenson.

"A combined Bank of England and government programme of monetary and fiscal stimulus will be required if Britain is to avoid recession."

This article was originally published by our sister magazine Money Observer here

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