Interest rates are being discussed passionately across the land as households and businesses are faced with sharp increases in the cost of debt. After more than a decade of near-zero rates, highly leveraged economies that geared up during the easy times are now faced with a reckoning. Investment bank Berenberg thinks that the debt surge “presents a dormant system risk to the global economy and to global financial markets”, a risk exacerbated by higher rates.
A central reason for the panic in the air is that a generation had become used to historically unusual rock-bottom rates. Rates have been on a general downward trend since the 1980s, with the ultra-low and even negative interest rates seen in recent years not having much precedence. Some financial historians think the low-rate experiment is at the heart of our economic malaise. Edward Chancellor argues in The Price of Time: the Real Story of Interest that ultra-low interest rates have contributed “to many of our current woes, whether the collapse of productivity growth, unaffordable housing, rising inequality, the loss of market competition or financial fragility”.
Be that as it may, the pivot into a higher-for-longer rate cycle is now here. Interest rates in the US (5.5 per cent) and UK (5.25 per cent) are at their highest levels in 22 and 15 years respectively.