Lower for not much longer?
Following last week’s stock market volatility, interest rates have come under renewed focus. Mark Carney stated that rates would need to rise ‘somewhat earlier and to a somewhat greater extent’ than previously anticipated. However, the conditions for and impact of rate rises are multi-dimensional, and not necessarily detrimental if they are associated with the economic growth that drives demand and increases rents. Higher rates also increase the value of sterling denominated assets, as we have seen in recent weeks. More pertinent to most of us is that if rates are maintained at their current levels for much longer, we will simply not be able to afford to retire. The flip side of the coin is of course that higher bank rates increase the cost of money and can act as a deterrent to both business investment and personal debt. We should perhaps keep an eye on the relationship between UK and US bond yields; historically tightly correlated (synchronous business cycles, equivalence of risk), but over the past two years beginning to decouple. A sign of things to come?