Ultra low rates have created a new generation addicted to debt

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Have low interest rates created broader problems than politicians and people realise? In the wake of the 2008 global financial crisis, interest rates were slashed from 5.25 per cent to 0.5 per cent and we have become addicted to cheap money policies ever since — impacting peoples’ attitude towards saving and borrowing. In particular, a generation of younger people have spent their entire adult lives with interest rates at rock bottom.

Due to the imminent cost of living crisis, there is now a recognition that the Bank of England was asleep at the wheel last year and did not act early enough to curb inflationary pressures. Although it raised rates in December from 0.1 per cent to 0.25 per cent, they are still low. This poses a challenge to financial stability. Low rates mean financial markets do not price properly for risk, encouraging speculative behaviour. This last happened ahead of the global financial crisis. Equally, because of quantitative easing, the Bank of England is now the biggest holder of government debt, which has artificially inflated bond prices and kept longer-term borrowing yields low. We used to believe that such low yields would boost investment. Now they seem to encourage firms to load their balance sheets with debt.

Perhaps the biggest concern, though, is that the culture of low rates has exacerbated inequality. They have fed rampant asset price inflation. This is not just of stocks and bonds, but also of house prices. While there are other factors at play, cheap finance has been a key driver. Even though mortgage rates are low, buyers have had to take on more borrowing, burdening themselves with debt. This has fed imbalances between home-owners and renters, between the asset rich and asset poor. Pensioners who rely on bank deposits have suffered, but it is the young who are impacted most.

Younger people increasingly can’t move from Generation Rent to Generation Buy, which is part of a broader challenge they have in seeing themselves as being able to amass capital. Assets that should be attainable are too far away for too many. One might be tempted to say we are moving from a property-owning democracy to an always-borrowing democracy. Of course, higher wages are part of the challenge, not just low interest rates.

Unfortunately, some may only have access to loan sharks or pay day loans — but even among the wider population of younger people, the interest rates charged on student debt are much higher than they really should be.

All this is helping to feed a shift in attitudes towards borrowing among millennials. Buy now and pay later is increasingly seen as more viable, in part because low rates mean this is not seen as debt but instead as a more convenient and sensible way to pay. Before credit controls were relaxed in the 1980s, this was viewed as borrowing on the “never-never” — where only part of the cost was paid immediately and the rest over time, but often then at high borrowing rates. Then people did it because they had no other options; more interesting is that it is now made by choice, because rates are low.

Although interest rates look set to rise this year, they will still be low by historic standards. Many of these challenges look set to persist long into the future.

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