The seven-year itch: how have record low rates affected the market?

Today marks the 7th anniversary of the introduction of Quantitative Easing in the UK, and of Bank of England base rate being cut to 0.5%.

Related topics:  Special Features
Rozi Jones
5th March 2016
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Laith Khalaf, Senior Analyst at Hargreaves Lansdown, said that "loose monetary policy has supported rises in stock, bond and property prices over the last seven years, while annihilating the returns on cash."

Since 2009, 1.8 million first time buyers have entered the property market.

Mortgage rates have averaged 3.4% since March 2009, compared with an average of 5.8% in the previous 10 years. On a repayment mortgage of £200,000 that works out as £270 less each month, or £3,280 less each year. The average mortgage rate on outstanding debt now stands at 2.96%, its lowest level since Bank of England records began in 1999.

UK savers have been hit hard by loose monetary policy. Those holding cash have lost out on an estimated £160 billion in interest since the financial crisis, compared to the rate they were receiving in September 2008. This is equivalent to £6,000 per household in the UK. Meanwhile the amount of money held in non-interest bearing deposit accounts has almost trebled since March 2009.

Investors have enjoyed strong returns from both the stock market and the bond market since March 2009. Quantitative Easing has helped to supply both liquidity and confidence to markets. Meanwhile low interest rates have helped companies access debt markets cheaply, while making their dividend streams look very appealing to investors.

However Laith Khalaf spoke of the "worry haunting financial markets... that we have actually hit the peak of the post-crisis economic cycle and are slipping back into a global slowdown".

Turning to pensions, Steven Cameron, Pensions Director at Aegon that as annuity providers base the rates they can offer on the return on long term fixed interest investments such as government bonds or corporate bonds, low base rates have caused low yields on these investments.

Cameron added:

"When coupled with the Chancellor’s programme of Quantitative Easing, means annuity rates have been at a historically low level for the last 7 years. Annuity rates are also affected by life expectancy and as this has been increasing, this has led to further downward pressure on annuity rates, except for those lucky enough to have a guaranteed annuity rate.

“It could be argued that the long term trend of low annuity rates, energetically highlighted by Ros Altmann in her consumer champion days, may have been a factor in encouraging the Chancellor to introduce the pension freedoms. However, even those who are now taking advantage of new means of accessing their retirement savings are affected. Those opting for flexi access drawdown for example will find risk free returns particularly low and while equities may offer higher returns, they are also more volatile, leading to growing interest in guarantees."

However on a positive note, Dixon points out that borrowers have seen the costs of their loans plummet, with many paying down their debts far quicker than in previous years whilst building equity in their properties.

Nick Dixon, Investment Director at Aegon UK, expects low rates to continue, with the Bank of England showing "no sign of hitting the 7-year itch".

He said that emerging fears around potential Brexit, falling oil prices, and choppy stock markets impacting investment decisions of businesses and consumers alike will see record-low rates pass the 8-year milestone in March 2017.

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