We’re all economists, now

Every time I return to the subject of interest rates, thinking that it will be an appropriate moment to share my thoughts, there’s another update, upheaval, convulsion which takes the conversation in an unexpected direction. Cue another crumpled up, half-written sheet of A4 aimed at the bin.

Opinion

Web Share

Every time I return to the subject of interest rates, thinking that it will be an appropriate moment to share my thoughts, there’s another update, upheaval, convulsion which takes the conversation in an unexpected direction. Cue another crumpled up, half-written sheet of A4 aimed at the bin.

By Jonathan Punter

Every time I return to the subject of interest rates, thinking that it will be an appropriate moment to share my thoughts, there’s another update, upheaval, convulsion which takes the conversation in an unexpected direction. Cue another crumpled up, half-written sheet of A4 aimed at the bin.

Can there have been a time when there has been such a key focus on interest rates? Last Wednesday’s volatility and the fault-lines it exposed in the confidence underpinning markets became another news day in which talk turned to interest rates.

The next day, the Bank of England’s chief economist loudly signalled interest rates will be lower for longer because of doubts over the eurozone and the strength of the UK economic recovery. Andy Haldane’s comments will, doubtless, reassure jittery markets and is “not ready yet” writ large.

I recently asked for views on two simple questions: when interest rates SHOULD rise and when they WILL rise. This seems a good time to report back.

I’ve done my best to track the ups (but mostly downs) and conditions affecting interest rates, the main economic artery identified as responsible for pumping vigour back into markets, freeing them of (QE) life support and shrinking DB liabilities in the process.

In my very unscientific survey (even actuaries are allowed this luxury), your response to when rates SHOULD rise revealed more uncertainty than I thought would be the case  with a fairly even split saying rates should rise BEFORE the General Election – 38% – and just over that – 42% a year after. The remaining 20% thought it should be later still (perhaps they saw last week’s turmoil coming?).

Consensus takes hold, however, on the subject of when rates WILL rise. Precious few – 20% – believed they would start to mushroom before next May while 60% thought it would be the following year. At least our contrarian contingent remained consistent: 20% saying it will happen even later. It seems we are more confident predicting political motives, rather than economic timing.

As for the comments, here’s a selection. One thumbnail analysis: “Any increase in rates pre-election is unlikely. Partly for political reasons, but also because, as you say [in the previous blog], wage growth remains sluggish. This will continue partly because growing numbers of auto-enrolled workers will see their contributions ratcheting upwards in the next few years. Combined with ongoing certainty over growth levels in key global markets (eurozone, Russia and China), any rate rise will probably be small, and some way off.”

Another reads: “I believe that while inflation stays below target and with household debt as high as it is, officials have little incentive to raise rates. That said, however, there is lots of evidence which suggests that spare capacity in the economy is shrinking fast, and that lower unemployment will lead to future wage growth – so I believe rates will increase soon after the General Election next year.”

Others are a bit more certain: “0.25% rate increase middle of next year, when people are expecting it, minimises potential shock to the system.”

Another, downright precise, pinpointing that, in November next year: “0.25% increments, every three months, topping out at 2.5%.”

Oh for such absolutism in the real world. Thank you for taking a couple of minutes to contribute. If you still haven’t, the survey is still open and is something I’ll revisit from time to time.

And where do I stand? Those who know me might not be surprised to know that it’s with the contrarians. Changing circumstances dictate caution. Rates will be lower for longer.

Adding my voice to the fray might not offer a tangible result, but is a demonstration that more of us are taking part in a national conversation which has moved far beyond its traditional participants and familiar venues.

In the spirit of my previously-stated desire for broader financial education, it seems we’re all economists now and we just might be a little richer – in knowledge, at least – for that.

 

Jonathan Punter is chief executive of Punter Southall

 

Comments

More Articles

Subscribe

Subscribe to Our Newsletter and Magazine

Sign up to the portfolio institutional newsletter to receive a weekly update with our latest features, interviews, ESG content, opinion, roundtables and event invites. Institutional investors also qualify for a free-of-charge magazine subscription.

×