When Will Rates Rise Again?
A lower interest rate doesn’t make a debt go away
The COVID-19 pandemic showed that central banks had the tools and willingness to use them to counter the dramatic collapse in global economic activity. Through monetary policy that kept bond markets liquid and super-easy borrowing terms with ultra-low interest rates, economies and financial markets were able to get back onto their feet quickly after a few downright scary months in 2020.
Cheap debt also helped fuel the desire of many Singaporeans to load up on property purchases. Latest URA statistics below show a tremendous increase in take-up rate and the consequent rise in prices given the strong demand. Property investors might be bullish on the market, but as Dave Ramsey said above — a low rate of borrowing doesn’t erase debt.
Rising household debt also prompted the MAS to issue a warning at the end of 2020 because of how much loan growth had risen. Data from CEIC shows a significant month on month rise in household debt from the bottom of the COVID-19 crisis in Apr 2020 till the last available data point in Mar 2021.
An important question now would be: When will rates start rising again? — Which might possibly put pressure on those who had taken up new levels of debt. Data suggests that the coming rises in inflation is unlikely to spiral out of control. Similarly, forthcoming research on the unwinding of loose monetary policy shows that central bank policy rates, and more broadly, interest rates, are likely to rise, but only modestly, in the next several years.
Despite mass vaccination ongoing, the pandemic still rages on strongly in parts of the world. This makes it likely that economic recovery from the blow that COVID-19 has dealt will be gradual, and unlikely that interest rates would rise so quickly. As such, property owners with mortgages on their book can rejoice for a little while longer.
However, this also presents a dilemma to savers and retirees who rely on other investments to generate an income for them. As we showed in the previous week, the current low interest rate environment has forced many to seek higher levels of risk, concentrating their portfolios into less diversified higher yielding instruments. This presents a big problem when markets eventually correct and may leave many with undesirable outcomes.
Interest rates will eventually rise. The transition from a low-yield to a higher-yield environment can bring some initial pain through capital losses within a portfolio as well as make debt servicing that much harder. When investing, be it in property, dividend yielding stocks, higher yielding bonds, or commodities, investors should always remember the basic tenet of diversification — to ensure that you are not “surprised” when your investments don’t perform according to plan.
