Cliff Taylor: Best take advantage of rock bottom interest rates

Economic forecasting is a mug’s game. Economists have dressed up their profession in a way that makes people – including us in the media – take their predictions seriously.

But economic models are based on assumptions, and many of these are about that most unpredictable of things – the behaviour of human beings.

We have become used to low interest rates, and all the forecasts are that the era of cheap borrowing is set to continue. But to bet on this would be to take a big gamble, particularly for a country like Ireland with a high national debt and high borrowings in both households and businesses.

One day interest rates may start to rise again, meaning it is essential that Ireland takes full advantage of the current period of rock-bottom rates.

First, stand back and look at the extraordinary era we are living through when markets fret about whether the US Federal Reserve might edge up rates from 0.25 per cent to the heady heights of 0.5 per cent. In Europe the ECB is cautiously optimistic that the recovery is taking hold but still only sees growth of 1.6 per cent this year and inflation not far above 0.2 per cent.

It would suit Ireland nicely if ECB rates remained at rock-bottom while the US and UK economies continued to grow. We may get what we wish for. There is certainly nothing to suggest an early rise in borrowing costs here. The ECB could yet be under pressure to boost its monetary stimulus even further.

But Ireland needs to prepare for interest rates starting to edge upwards, even if that does not start to happen for, say, 18 months.

The Irish economy remains in an odd place. Growth is strong, and this week’s unemployment figures are encouraging, slowing the rate below 8 per cent. Brexit is a big risk but if this is avoided then investment plans should continue to create new jobs. The latest exchequer figures are reasonably strong and suggests a decent performance in the underlying economy.

Competition

Yet the legacy of the crisis lives on. National and household debts remains high, and the amount of credit extended by the banking system continues to fall year-on-year, notwithstanding some recent signs of revival in some areas.

The banking system remains dysfunctional, and there is a chronic lack of competition. Interest rates for mortgage borrowers are still too high

Locking in lower rates – in what may be a once-in-an-era opportunity – needs to be the strategy for the State as well as households. This means using strong growth and the savings we are making on our national debt to future-proof our public finances, lowering the debt ratio and leaving leeway in terms of annual borrowing.

There is a case to borrow to fund State investment but only when there is a decent economic or social return.

Some companies are using the low interest rate environment and the prospect of the ECB buying their bonds to refinance their own borrowings – the Dublin Airport Authority and the ESB both recently issued bonds. The NTMA will no doubt plan to continue to do the same for the State.

And then there is the consumer. The benefits of the low-rate world are simply not being passed on – via low variable rates or the opportunity to lock in for long periods – either to households or SMEs.

Our crocked banking system is sucking up a lot of the gains for itself.

As the Professional Insurance Brokers Association (PIBA) said on Thursday, there is still not a culture of longer term fixed rates here, and those fixing for, say, three years could be coming back off these arrangements when rates are on the rise again.

On a €250,000 mortgage it calculates a two percentage point difference in interest rates means paying almost €67,000 more in interest over a 20-year loan.

With banks able to borrow for long periods at rock-bottom rates, PIBA argues that borrowers should also be able to lock in. It surely has a point – it is probably as important an issue as the one about the standard variable rate.

There is no sense coming from our national planning that we may have a limited window of super-low interest rates and that we must take advantage. Low rates, of course, may continue for a prolonged period of years.

But best , surely, not to rely on it.