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Why coronavirus has shifted interest in interest rates to zero

One constant in this shifting world is me mentioning interest rates and inflation in my blog whenever possible.

If you were in my line of work, you would, too. Actuaries managing pension schemes (as I have for much of my forty-year-plus career) watch these rates like a sailor follows the wind and tide.

Put simply, they are one of the key factors in determining the fund’s growth. You always bear them in mind when scanning the horizon.

Since 2008, the online commentary on interest rates can be split roughly along these lines; those who believe interest rates will never return to what they were before the credit crunch; those who think they will recover over the long-term and those (a minority) who reckon they will fall still further.

Amid the economic impact of this pandemic, those in the latter camp will have drawn little comfort from guessing correctly.

Where we are now brought to mind something I was trying to explain to an associate earlier this year before the crisis. He asked what it was that enabled a business like ours to expand and thrive over the decades.

One critical factor

As you know, it’s not just one quality or insight, but a combination - but there was one critical factor. And that is things go wrong.

And when they do, clients want someone they know and trust advising them. It’s one of the reasons that it’s not unusual for actuaries to advise the same client over their entire career.

This is one of those times. I have some observations which may help to explain where we are in terms of interest and inflation rates. Incidentally, my interview with Tom Becket of Punter Southall Wealth goes into more detail about this.

Zero interest rates

Although interest rates are at zero both here, in the US and minus 0.5 per cent with the ECB, the reality is that they’ve been in negative territory for some time.

Even while interest rates were marginally above today’s level, low inflation rates effectively combine to create this environment.

We have been in a similar spot before. In the 1970s, rising inflation rates stripped out any real return from interest, effectively turning them negative.

Individual economies and the global system came back from this into relative prosperity, or The Great Moderation, a period of steady growth and (relatively) volatility-free progress that spanned the mid-80s (and the formation of Punter Southall) to the end of the 20th century.

Cue the 21st century, 2008 and low interest. And now this. The lowest real interest rates and inflation combining to deliver the lowest nominal (not adjusted for inflation) interest rates ever seen.

Negative rates!

Our background is pensions, where the formula is to balance the urgent with the important: making decisions on what is pressing now in service of the strategic, long-term objective of ensuring members are paid what they are due.

Fundamentally, we have to look beyond the “negative” label and view this as simply a drop in interest rates. For example, a decrease from four per cent to two per cent and a fall from zero per cent to minus two per cent is a reduction of two per cent.

It doesn’t sound as dramatic as “under water” but it’s the same place on the chart. Two per cent down.

Beyond the norm

But the final point I want to make rather invalidates my previous thoughts. What we are facing goes beyond normal economic calculation.

We’ve seen government step in to support the economy in a manner unparalleled in modern history. It’s accounting for around £50bn in its overall efforts (just under half the cost of the expected final bill for HS2, which is going ahead).

And they may yet have to do even more. As I write, Spain is planning to pay a universal basic income to help its economy and people now and into the future.

While this idea has previously been discussed as a measure to cushion workers against the advance of automation, it is now being shaped as a response - in the US, too - to keep society functioning in this dark time.

Interest and inflation rates have dominated much of my professional life and will continue to be critical but, for now, they are where they should be: a component in what will be a much broader, bolder response to protect our way of life.

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Actuaries managing pension schemes watch these rates like a sailor follows the wind and tide.

"You ain't seen nothing yet!"


Jonathan Punter interviews Thomas Becket, Chief Investment Officer of Punter Southall Wealth.


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After 40 years of experience in the pensions world, I'm sharing my insights.