In my last article, Negative Interest Rates: Who’s Interested?, I touched upon the potential negative impact the current interest rate environment can have with regards to asset bubbles and large debt burdens. However there is also scope to focus on the impact low interest rates can have on the average household.
The effort of central banks across the world to push down interest rates is based on a number of factors. Firstly, it is designed to encourage spending to boost economic growth as well as spur inflation. Secondly, unattractive returns on cash discourages households from saving due to the low return earned and in fact can cause complacency in the amount of debt (i.e. mortgages or other loans) accumulated. For example, NatWest currently offers just 0.70% for a one-year fixed ISA on funds between £1,000-£25,000. In 2009, a similar ISA would have offered over 3.2%. Going back even further, a one-year fixed-rate savings account in 2007 offered around 6% in interest. The bottom line is that saving is widely less attractive than it once was.
“We are asking young people to save in an environment where there are no Brownie points for saving” said Janette Rutterford, professor of financial management at The Open University.
It has been suggested that discouragement from saving in recent years has led younger people to ditch the “savings habit“. Young families are more financially fragile and more exposed to expensive debts (such as credit cards). According to a recent survey, a quarter of UK households would have to rely on loans or ask family and friends for help when faced with an unexpected bill.
“The foundation stone of wealth accumulation is defence, and this defence should be anchored by budgeting and planning” – Thomas J. Stanley
Hargreaves Lansdown believe that since 2009, low interest rates have cost savers up to £160bn – the equivalent of £6,000 for every household in the U.K. This is deeply troubling for people who will soon retire and are soon to be dependent on their savings. It could mean that many from within the 65+ demographic may need to seek help in order to pay for outgoings in their latter years.
A short-term period of low interest rates can be tolerated by savers however, if this persists it risks undermining the notion that saving is a worthwhile and productive activity. A combination of households having little savings and high debt can have significant ramifications over the long term, especially if the economy weakens as witnessed during the 2007/08 financial crisis.