£68 billion interest lost due to quantitative easing and low interest rates
A new report has analysed how much interest savers and pensioners have lost since the financial crisis, but also how much homeowners' equity has increased.
People in the UK have lost around £68 billion in interest since 2007 as a result of the Bank of England’s record low Base Rate and quantitative easing (QE) programme, according to a new study by the McKinsey Global Institute.
However, we haven't suffered as much as our counterparts in the US, in part due to the larger percentage of people whose mortgage interest rate fell as a result of the reaction to the global financial crisis.
What is quantitative easing?
Quantitative easing, or money printing as some commentators refer to it, is a process where a central bank buys up Government bonds, also known as gilts, from financial institutions. In effect, the bank, in our case the Bank of England, is in essence creating money from nothing.
This has the effect of pumping more money into banks and building societies, with the aim of increasing the availability of credit.
However, this also increases gilt prices, which in turn decreases what they pay out (known as the yield). This has a direct knock-on effect on the income people receive from pensions and annuities.
And the record-low Base Rate at 0.5% means savings interest rates are at rock bottom too.
In fact, last year the Treasury Select Committee suggested the Government should compensate pensioners for the effects of QE.
Homeowners boosted
The record low Base Rate, combined with a lack of supply, means house prices are 15% higher than they otherwise would have been, potentially offsetting the squeeze on incomes for many, says the McKinsey report. Of course, unless you sell your home, remortgage or release some of the equity from it, you won’t tangibly feel the effect of that increase.
In fact, with a relatively mild housing market downturn, but no crash, followed by a recovery, the report says the collective wealth of UK homeowners has actually been boosted to the tune of £602 billion over the past five years.
However, it notes that the majority of that increase in wealth is felt by people who already have significantly greater assets. In other words, the rich are getting richer. The Bank of England has argued that without its intervention unemployment would have been higher, growth would have been lower and businesses would have gone under.
The study also claims that lower interest rates have not hugely boosted share prices just because companies are now paying less interest on their debts.
Instead, it believes prices have risen mainly due to a massive overcorrection following the financial crisis. This has been disputed by other experts, who say the intervention of central banks encourage people to pile into riskier investments such as shares in pursuit of better returns.
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A warning for the future
The report ends by sounding a warning about the end of this era of low interest rates and QE. It predicts that for every 100-basis point increase in the Base Rate, for example from its current low of 0.5% to 1.5%, it will cost households an extra £11 billion in mortgage repayments.
On the flipside, savers should begin to benefit from rates rising but the report, perhaps unsurprisingly, forecasts potential volatility in stock markets as QE is wound down.
What do you think about the Bank of England's reaction to the financial crisis? Have you lost out or benefitted? Share your thoughts in the Comments box below.
More on the economy:
What next for inflation and interest rates?
Why the Bank of England should cap house price rises
How the Government spent your money last year
Can banks take your savings?
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Comments
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Surely QE is devaluation of the currency? It's exactly the same but it is masked with a different name. The only reason for QE is for the government to continue overspending; not this government in particular but all governments for the last 40 years. Even with the economy picking up now, government spending is still on the increase; people have got to get it into their heads that this cannot go on for ever. One day, western economies will collapse. Another point I want to make is about pensioners. Almost all pensioners have paid in to their state pension for all of their working life. If the state pension scheme had been set up properly (as Bevan intended), we would all have our pension pot (a state pension fund) and payment of pensions would not be a drain on government resources. No government has had the foresight to correct this - the opportunity offered by North Sea oil would have been a golden opportunity - but it needs to be done. A state pension should not be a "benefit" - it should be a "right" because it has already been paid for by the individual. Finally, if interest rates were not so low, house prices would not be so high. No-one benefits from high house prices, particularly the first time buyers, unless they sell and downsize. This is further emphasized by the government's "Help to Buy" scheme which guarantees a part of a mortgage with taxpayers money - of course it will push house prices up. There are lots of posters on here again with the traditional "left" or "right" views on politics; people who can't realise that we are being screwed by both main parties. r.
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As DaveW said, "QE just keeps the situation from going completely out of control into a crash, but the government can't do it forever!". The coalition will keep on doing it until they are voted out in 2015. At that point, with QE stopped and the crash upon us, they will spout, as usual, from the opposition benches, that it's all Labour's fault. I'm sick of this cuddly phrase anyway. At least when the Wilson government was in trouble they called devaluation, devaluation.
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First only pensioners who are home owners are likely to be beneficiaries of increased house prices. While that's around 60% of them, that leaves 40% who haven't benefitted. As a homeowner with 2 sons who have big mortgages, I have to reflect that my low savings rates have helped them through their mortgages. So in those terms they're getting a bit of their inheritance early. But for those who have savings but are renters, there will be few if any benefits from QE, apart from the fact that financial meltdown has been avoided and they may have a job that might otherwise have disappeared. QE can and should be unwound as the economy grows stronger - but while things are starting to improve here, much of the rest of the world still has problems of one sort or another and we are unlikely to be the economy that helps stimulate the rest of the world. Our economy was in a bad way in 2008/9. Leading old hands from both major political parties (Portillo and Livingstone) have recently reflected that the major parties in the past have at times, through the need to garner votes and get elected, promised too much that can only be sustained through borrowing. Borrowing at government level means shifting the burden to future generations. Its not fair, and its not sensible unless its countering the economic cycle. The last labour government having got debt to GDP down to post war low levels by initially following conservative spending plans, then from 2001 onwards, went on a spending and borrowing spree when allegedly the economy was already doing well. That debt has hindered the current governments ability to deal with the effects of the crash, and its one of the reasons for extensive QE. So at the next election think whether policies funded by borrowing are actually good for the nation and our children when casting your vote.
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23 November 2013