Saturday 5th March was the 7th anniversary of the introduction of Quantitative Easing in the UK, and of Bank of England base rate being cut to 0.5 percent.
Loose monetary policy has supported rises in stock, bond and property prices over the last seven years, while annihilating the returns on cash. Central banks have flooded the global economy with cheap money since the financial crisis, yet global growth is still in the doldrums, particularly in Europe and Japan, which have both seen colossal stimulus packages thrown at the problem.
Since 2009 the stock market has enjoyed a strong bull run, but one characterised by a high degree of pessimism over its foundations. The actions of central banks go some way to explaining this uneasiness, as investors have been wary of being left without a chair when the music stops. The worry haunting financial markets at the moment is that we have actually hit the peak of the post-crisis economic cycle and are slipping back into a global slowdown. Meanwhile after the extraordinary lengths they have already stretched to, central banks are running low on ammunition to stave off recessionary forces.
Overall, borrowers and investors have had the best of it since QE started in the UK. Mortgage costs have fallen significantly from pre-crisis levels, but this positive effect is laced with an underlying risk. If borrowers get too comfortable taking on high levels of debt at low interest rates, they could be in for a nasty shock if and when rates rise.’ Below are some key numbers which reflect how savers and investors have been affected over this period.
Sources: Hargreaves Lansdown, Lipper, Bank of England, to 28th Feb 2016
*Estimated by Hargreaves Lansdown, from September 2008, see below for more details
Effects of QE
Since 2009, 1.8 million first time buyers have entered the property market and have no experience of anything but borrowing costs at ultra low rates. Mortgage rates have averaged 3.4 percent since March 2009, compared with an average of 5.8 percent 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 percent, its lowest level since Bank of England records began in 1999. That could mean a considerable shock if and when interest rates do go back up. The risk is that in the interim, low interest rates mean borrowers get too comfortable with high levels of debt and over-extend their finances.
UK savers have been hit hard by loose monetary policy. We estimate those holding cash have lost out on £160 billion in interest since the financial crisis as a result of loose monetary policy, 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. The numbers in the table above show that savers holding cash have lost money in real terms since March 2009, i.e. taking inflation into account. Of course some savers will have received an offsetting benefit from loose monetary policy through lower mortgage rates and higher asset values.
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. Indeed this latter point has led to strong performance from stocks like Unilever, Reckitt Benckiser and British American Tobacco, whose stable dividend payments have seen investors flock to them as ‘bond proxies’, seeing as bonds are paying so little interest. These stocks have also earned the name tag ‘expensive defensives’ given the high price premium they currently carry compared to the rest of the market.
Loose monetary policy has helped to prop up asset prices across the globe, but it has also left central banks in a precarious position of having few remaining policy options if the global economy starts to slip back towards recession. This goes some way to explaining why slowing global growth has given the stock market such a bad case of the jitters. We expect monetary policy to remain in a dovish mood, indeed now the Eurozone has slipped back into deflation, the European Central Bank is under pressure to step up their QE programme when they meet on 10th March. Meanwhile in the UK we expect rates to stay rooted to the zero-bound for the foreseeable future. Interest rate markets are now discounting any chance of a UK rate rise this year, and are actually pricing in around a one in three chance of a rate cut.