Money Times - December 29, 2015

Posted by Jill Kerby on December 29 2015 @ 09:00


It’s been a disappointing year for savers, but the 0.25% increase in the US Federal Reserve base interest rate (to 0.25-0.5%) is the first sign that the zero rate experiment by central bankers may be coming to an end.

It is nearly eight years since the US interest rate has been moved upward. The decision was taken last week on the grounds that the combination of years of low rate and the earlier massive, $4 trillion campaign of quantitative easing (QE) in which bank and mortgage debt was purchased by the Federal Reserve in order to encourage more lending has been a success and the US economy is sufficient strong to allow the cost of money to find it’s own level again.

Many commentators disagree and suggest that there may yet be a serious fall-out from this hike, especially in the bond markets but until there is a negative reaction from debtors and the debt markets, higher rates will (eventually) reward savers and investors, who’ve lost the most over the last eight years of zero returns.

Contrary to the theory that low interest rates and all that cheap money would stimulate business investment, more jobs, higher wages, increased productivity and more spending, all that QE and low rates barely impacted on the US domestic economy for most of the past eight years, except to hasten the paying off of debt. 

Not only did the low to zero return on money encourage the paying off of debt in America, Britain, the EU, Japan in the immediate aftermath of the great crash, but it also encouraged people to hoard their cash.  The desperate signals the central bankers were giving out – that our economies are so bad that we must print massive sums from this air to pump some life back into them – were counterproductive (and clearly haven’t worked as well as was expected.)

A 0.25% increase is welcome, but puny, so it could be many months, even in America before deposit rates rise to even meet the official inflation there, which is still just under 2%. When they do, that all-elusive ‘confidence’ level that comes with an economy that is genuinely growing might really take hold.  

Meanwhile, we might have to wait even longer.

The ECB only recently announced that the sclerotic state of the eurozone (outside of Germany and Ireland) means they will step up their version of QE – the printing of €60 billion a month to buy up government bonds sitting in European banks – by another six months to the spring of 2017.

The ECB interbank rate is therefore likely to stay at 0.05% and ordinary savers here shouldn’t expect any increase in the 1%-1.25% demand deposit rates per annum that they are getting now. The only way to secure a higher return on your money once 41% DIRT and your own inflation rate is taken is to look for other opportunities other than deposits.

Many advisers I’ve spoken to believe that unsuitable investment funds have been sold to vulnerable, usually older people who need to boost their fixed pension incomes. They’ve been enticed into buying individual stocks and bonds with inappropriately short or long time frames. Or the funds or assets they’ve purchased carry fees and charges that are too high or with too high a tax liability.

The biggest stock markets have responded brilliantly since 2009 to the huge injection of cheap cash and share buy-backs loans available to the already wealth share owners and corporations.  But that momentum could disappear if the cheap money eventually comes to an end.  What happens then to the already reluctant, older investors who felt compelled to get into these volatile markets to boost their incomes?

Until the ECB ends QE and allows interest rates to find their own level again, Irish savers need to remain alert and canny to the dangers of chasing yield. That means

-       You must regularly compare up-to-date bank deposit rates to maximise interest. Use sites like bonkers.ie, consumerhelp.ie for up-to-date bank and tax-free state savings rates and don’t forget to check the dividend at your local credit union.

-       Consider investing a portion of large cash holdings if you are adamant about getting a higher return, but only if you fully understand the risks and longer term commitment.

-       If you invest, don’t put all your savings in a single asset. Aim for the lowest cost, most widely diversified fund possible. Always use an impartial, fee-based adviser.

-       Check out peer-to-peer lending opportunities – usually 36 months long - in which you can lend small sums to multiple borrowers for higher returns. (These lending schemes carry real risks to your capital.)

-       Pay off any expensive debt with your savings. The future compound interest you will avoid is the equivalent of an investment ‘return’.


Do you have a personal finance question for Jill or would you like a copy of her new Talking Money Guide, which can also be downloaded directly at www.irishlife.ie? Write c/o this newspaper or by email: jill@jillkerby.ie



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