The impact of long term low interest rate environment

[DublinHead54]

Ten years on from the financial crisis the monetary policy of central banks to cut interest rates to stimulate the economy seems to have shifted to a long term solution. The Fed announced yesterday they don't plan to raise interest rates until 2023 and I assume Europe will follow a similar trajectory. I am wondering what the long term impacts it is going to have on consumers and the wider economy and thought it would be an interesting discussion.

My thoughts from a consumer point of view are that we benefit from low mortgage borrowing costs, although this allows larger borrowings (central bank lending caps) which may cause house prices to increase. The flip side is there is little interest to be earned saving in bank or state savings. The common theme on this forum is 'keep a minimum rainy day fund, pay off mortgage and overfund pension'. It is tax-inefficient to invest large sums in the stock market (liquid assets), thus people will end up asset rich, cash poor to a degree. In addition, the government has introduced additional taxes on private landlord.

You hear the term for institutional investors 'seeking yield', us individual consumers want that as well but from a tax perspective it does not currently make sense. So in a long term low interest rate environment, is it time the government revamp tax on investing?

 

[NoRegretsCoyote]

I think low-for-long will push up property as there is really no other asset class left with yield.

This has really had an effect in the Netherlands and Germany where mortgage rates have been low for a decade now.

German prices are in real terms up about 40% over the last decade.

 

[Laughahalla]

You might find more lending to subprime and uncreditworthy people/institutions. High risk but potentially high yield. Plenty of peer to peer companies out there yielding 8-9% when all is rosy but they carry a lot of risk.

 

[Aamstrong]

I think they should introduce something like the 'ISA' in the UK: say a 5,000eur a year deposit allowance into investments that once it is in the ISA wrapper would never be taxed. People can dip into it for emergencies and large purchases but in general wouldn't touch it.

 

[joe sod]

Also the stock markets have not done well since the financial crash, excluding of course U.S. technology the only outstanding performance. Iseq moribund with the banks facing a renewed shift downwards again, the ftse 100 below where it was in 1999, the only saviour of the ftse, dividends, have now been cut because of covid. So Europe, UK , emerging markets are down significantly even the US not so great once you strip out the big technology stocks, remember technology was cause of the early 2000s recession so would have been a very small part of anyone's portfolio coming into the financial crash.

 

[Jim2007]

You might find more lending to subprime and uncreditworthy people/institutions. High risk but potentially high yield. Plenty of peer to peer companies out there yielding 8-9% when all is rosy but they carry a lot of risk.

The average return on stocks over the past 10 years has been 11%+, why in heavens name would you doing subprime lending for less....

 

[Jim2007]

Also the stock markets have not done well since the financial crash, excluding of course U.S. technology the only outstanding performance. Iseq moribund with the banks facing a renewed shift downwards again, the ftse 100 below where it was in 1999, the only saviour of the ftse, dividends, have now been cut because of covid. So Europe, UK , emerging markets are down significantly even the US not so great once you strip out the big technology stocks, remember technology was cause of the early 2000s recession so would have been a very small part of anyone's portfolio coming into the financial crash.

Really 11%+ average on stocks is not doing well.... and my fund averaged 19% over the past ten years.... one of the problems is that Irish people really don't know how to invest.... oh they talk it alright, but when it comes to execution the go off in tangents messing around what are essentially penny stocks.

 

[DublinHead54]

Interesting to see the 'robinhood' effect in retail investing in the US. I have seen stories of Robnhood contributing to 20% of daily volume on the stock markets the last few years.

Also there is a generational aspect, millennials and Gen Z were not in the stock market during the Tech Bubble in 2000 and Gen Z not during 07/08, so it is not surprising to see Tech stocks grow. As they are all services that are used by millennials and gen Z. Arguably there has been a bull market since 2010 so people getting into the market for the first time since 2010 should have a portfolio of equities that has positive returns.

I would agree on the ISA point, that would be a great addition for Ireland. I am not sure why we don't have it already?!

 

[joe sod]

The average return on stocks over the past 10 years has been 11%+, why in heavens name would you doing subprime lending for less....

What are "stocks" us stocks, European stocks, technology stocks, emerging markets ?, so maybe the msci world index which has a big weighting to us technology you would have that performance. However vast sections of the global stock markets are down since the financial crash. It would not be unreasonable to say a decade ago that you were fairly diversified if you had a ftse index fund or a European index fund,( Europe an advanced economy with 500million people yet it's stock markets have gone nowhere) but that has turned out not to be the case, if you didn't have exposure to the 5 big US technology stocks you are most likely down since 2015 , all of the performance since the corona virus pandemic has been confined to these stocks with massive stocks like Apple up 60 %. A decade ago the biggest stocks on the msci were the oil and financial stocks yet these are decimated now.

 

[Sarenco]

maybe the msci world index which has a big weighting to us technology

The sector weighting of information technology in the MSCI World Index is 22.3%.

vast sections of the global stock markets are down since the financial crash

The MSCI World Index Ex-USA Index has returned an annualised 6.15% over the last 10 years.

It is simply untrue to say that global equities, excluding US technology stocks, have not performed well since the financial crisis and I'm at a loss why you insist on repeating this nonsense.

 

[camlin90]

The Central Banks have created bubbles everywhere in order to solve the last recession, so now the only game left for them is to do "whatever it takes" to keep these bubbles inflated through negative rates and QE. It's the Irish property bubble of 00-07 on a global scale. The next step which COVID has accelerated is to eliminate cash and then negative interest can be applied to all bank accounts. Ultimately the Irish property bubble burst so it remains to be seen can they keep this going in perpetuity

So it's pick your bubble imo. Precious metals and bitcoin could gain more traction.

 

[Brendan Burgess]

Cliff Taylor: What permanently low interest rates mean for you as a saver or borrower

Smart Money: A new era of super-low mortage rates – and pressure on banks to charge for your savings

www.irishtimes.com

 

[DublinHead54]

Cliff Taylor: What permanently low interest rates mean for you as a saver or borrower

Smart Money: A new era of super-low mortage rates – and pressure on banks to charge for your savings

www.irishtimes.com

Thanks Brendan, I did not consider the impact on investing in my pension. The whole low interest rates really questions the profitability of the local banks, Large international banks have other revenue streams they can live off.

What I would like to see is a platform service model, i.e. a central platform that third parties operate on offering banking services and I can pick and choose which service I choose. For example, maybe I choose BoI for a Credit Card, Revolut for my day to day spending, and KBC for my mortgage. When I apply to KBC for the mortgage they automatically see my credit card statements and daily spending.

I think with Open Banking we are moving in that direction.

 

[Zenith63]

I think they should introduce something like the 'ISA' in the UK

I’d really like to see us move in this direction. It would help close the gap between the yields wealthier people can access vs what your average Joe gets in a bank account, inequality.

It could also be used to implement one of Brendan’s regular suggestions: that first time buyers should be able to access their pension (but in this case their ISA) to pay for their house deposit.

It could be implemented cost-neutral by reducing maximum pension pot sizes by whatever the ISA limits are set at.

 

[DublinHead54]

I’d really like to see us move in this direction. It would help close the gap between the yields wealthier people can access vs what your average Joe gets in a bank account, inequality.

It could also be used to implement one of Brendan’s regular suggestions: that first time buyers should be able to access their pension (but in this case their ISA) to pay for their house deposit.

It could be implemented cost-neutral by reducing maximum pension pot sizes by whatever the ISA limits are set at.

How do we go about raising this to the government and try and get it on the agenda?

 

[Itchy]

It could be implemented cost-neutral by reducing maximum pension pot sizes by whatever the ISA limits are set at.

That's a good suggestion.

 

[Zenith63]

How do we go about raising this to the government and try and get it on the agenda?

I came across the Irish Savers Action Group a few weeks back who are a new group advocating for an ISA type scheme and/or improvements to the deemed disposal rule to aid regular small savers, might go somewhere, know nothing about them yet and have no personal involvement to be clear - https://old.reddit.com/r/ireland/comments/gz3597/update_for_irish_savers_action_group_isag/