![Pinterest](https://pinterest.com/pin/create/button/?url=https://uknews.evprotec.com/good-riddance-to-the-age-of-negative-real-interest-rates/&media=https://uknews.evprotec.com/wp-content/uploads/2022/11/TELEMMGLPICT000314950153_trans_NvBQzQNjv4BqWy_u4a9GUNQgLIY2EGV3qghi1ZMFW4tO_4Pqw0owwW0.jpeg&description=Some of the biggest immediate beneficiaries are ironically Britain's legacy, defined benefit pension schemes. I say ironically because these funds were also at the centre of last month's panic in gilt-edged markets, with their very solvency threatened by fast rising interest rates. The reason they found themselves in such a hole is none the less instructive. To improve on paltry levels of return, they'd been persuaded to take on the leverage of so-called "Liability Driven Investment" strategies, and therefore found themselves having to dump assets to satisfy margin calls as interest rates rose. The consequent "doom loop" in gilt prices only came about because yields had sunk so low that they were failing to keep pace with liabilities. Riskier hedging strategies, which were of course sold as fail-proof, became the order of the day. But now that the immediate crisis is over, with the treacherous positions substantially unwound, pension funds find themselves major beneficiaries of rising interest rates; the effect is materially to reduce the cost of funding future liabilities. This in turn eases the pressure on corporate sponsors to plug deficits. The same is true of other net cash or near cash savers. There are a lot more of them than you might think. Extrapolating from the latest English Housing Survey, only around 30pc of UK households are mortgage holders. Some 35pc own their houses outright, or in other words, non-mortgaged home owners outnumber the mortgaged ones; such home owners are likely to have substantial cash savings. None of this is to argue that in the round the beneficiaries of rising interest rates fully compensate for those who are hurt by them. Higher interest rates will always be contractionary, if only because those in debt tend to spend what they earn and will therefore have less disposable income as borrowing costs rise. Whereas those with already high savings are less likely to spend from the extra income they derive from rising rates. Further){kind=link}
Wherever rates eventually settle, it is hard to imagine them going back to zero in any foreseeable future
Great news; interest rates are rising strongly, returning them to a semblance of pre-financial crisis normality. For the first time in more than a decade – when the balance of benefit has overwhelmingly been with creditors – there is reason to hope that savers are back in the driving seat, or at least soon will be.
OK, so this is not a popular sentiment. The headlines after last week’s interest rate rise, the biggest in 30 years, told an altogether different story, with household finances seemingly trashed by a combination of rising energy bills, food prices, and now mortgage costs.
To be welcoming a tight money environment in the midst of an already crushing cost of living crisis and a gathering recession might therefore be thought a tad insensitive.
Markedly higher rates are most decidedly not good news for those with large mortgages and other forms of debt; particular sympathy should be reserved for those who have only just managed to clamber onto the housing ladder. Forced as most of them have been to borrow heavily to afford today’s eye-wateringly high house prices, they now face an especially gruelling squeeze.