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Interest rates - lower for even longer?

Jonathan Wright

Jonathan Wright - Fidelity Personal Investing

In a bid to boost the European economy and kick-start inflation, the European Central Bank (ECB) has announced an ambitious new stimulus package.

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Yesterday the bank cut its deposit rate, which was already in negative territory, from -0.4% to a record low of -0.5%. ECB president Mario Draghi also said the bank would restart its quantitative easing (QE) programme, buying €20 billion every month from November.

This is a far cry from the start of the year when the ECB had just ended its previous QE programme, where between 2015 and 2018 it had bought €2.6 trillion of bonds. Back then the world was expecting central banks to become more hawkish and permanently cut the life-support they were providing to the banking sector.

Across the Atlantic, markets were expecting up to four rate rises from the Fed over the course of 2019. However, that changed at the beginning of August, when the US made its first rate cut in a decade.

The Reserve Bank of India followed suit, cutting interest rates for the fourth time this year, to its lowest rate in almost a decade. Then the Reserve Bank of New Zealand surprised markets with a 50 basis point cut and Thailand unexpectedly cut its rate on expectations its economy was likely to grow more slowly than previously expected.

With the Federal Reserve due to meet next week, the battle around the world to devalue currencies has not gone unnoticed by President Trump. For some time, he has been putting pressure on the Fed to reduce US rates to make the dollar more competitive.

On Wednesday, before Draghi announced the European cut, he renewed his attack on the Federal Reserve in a series of tweets, saying the “boneheads” at the Fed were missing “a once in a lifetime opportunity” and called for US rates to be brought down to zero or less.

Why does President Trump want US rates to be lowered to zero? Simple, in the current trade war with China he wants to make US exports more competitive. With an election to win next year he is keen to tell blue-collar workers, especially those in the manufacturing sector, that he has made America great again. Low interest rates would also boost the consumer-led US economy by making borrowing cheaper.

We’ll hear from Fed chairman Jay Powell, on Wednesday on the fate of US rates. Currently the futures markets points to an 88.8% probability of a 25 basis points cut. With US rates currently at 2%-2.25% that would still be a long way off from Trump’s call for zero and still considerably higher than other developed economies.

This side of the Atlantic, the Bank of England will report back on UK rates on Thursday. Its focus remains on the outcome of Brexit and whether it’s forced to lower rates further in response to a disorderly exit from the EU, currently scheduled for 31 October.

Either way, it certainly appears that interest rates are likely to stay lower for even longer, since they were dramatically cut following the financial crisis. For borrowers, especially those with mortgages, we’ve got rather used to low rates. I wonder how prepared we would be if rates eventually were to turn upwards?

However, it’s savers, especially those requiring an income in retirement that have suffered the most from low interest rates. With cash deposits offering very meagre returns, many savers have been forced to look at riskier, stock market-based investments.

With the yield on the FTSE 100 currently at 4.5%, the income from the dividends paid by large, blue-chip companies is one option for those looking for an attractive income. Though this is level of income cannot be guaranteed, many of these international companies have benefited from the weak pound as much of their profits are earned overseas.

The easiest way to invest in these types of companies is by a managed fund that looks specifically for companies with a history of paying regular dividends, otherwise known as ‘equity income’ funds.

The Select 50 offers a range of equity income funds from those with a focus on the UK, like the Fidelity Enhanced Income Fund and JOHCM UK Equity Income Fund, to the Invesco European Equity Income Fund with its focus on Europe and the JPM US Equity Income Fund with its focus on the US.

For those wanting to go global it’s worth taking a look at the Fidelity Global Dividend Fund and Invesco Global Equity Income Fund.

Important information The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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