Where are interest rates going?

Here’s something to contemplate this Sunday morning: where are rates going?

Photo by Genevieve Perron-Migneron on Unsplash

In many ways it’s the most important question in finance - the biggest question in investing: what is the future price of money going to be?

Policy makers are caught between a very big rock and a very hard place. 

Official UK inflation stands at 8.5%. It’s higher if you use the traditional RPI as a measure. But real inflation is much higher still. Official measures only look at the price of goods and services, which are mostly prone to the deflationary forces of increased productivity. If you include things like house prices and financial assets inflation is much, much higher - over 10%. The same argument applies pretty much everywhere across the developed world.

Looked at another way, money is losing value at over 10% per year. The same salary in a year’s time will effectively be 10% lower in that it will buy you 10% less . The purchasing power of your savings will be 10% lower. The already extraordinarily large inequality gap between asset owners (the rich, the old) and everyone else (the young) will be 10% bigger.

Any responsible central bank, whose core remit is to keep a lid on inflation, would “do a Volcker” and hike up rates until this messy situation is under control.

But they can’t. There is too much debt in the system. If rates were put up to a level that reflected actual inflation - ie north of 10% - the housing market would collapse, stock markets would collapse, the bond markets would collapse and government’s own debt servicing costs would go bananas. Their budgets would be blown. In other words the whole system comes tumbling down. It’s a house of cards.

So they will make a lot of noise, edge rates up by ¼% here and ½% there and hope this unfortunate inflationary episode goes away.

Good luck with that.

Thanks very much for reading. Please check out my paid letter. Our stocks are starting to lift off. It looks like we are in a bull market. Bull markets don’t last forever, but they are fun when they do.