Cantillon: Rates expected to stay low for foreseeable future

Just how low will Draghi go? The ECB is, indeed, expected to move on Thursday, cutting the rate at which it takes on deposits from commercial banks further below zero. But what is really striking now is the length of time for which interest rates are expected to remain low.

Forward rates on the euro market suggest that rates are going to stay low for the foreseeable future. In fact, the markets don’t foresee rates starting to rise for another seven years, to be precise. That could change, of course, and change quickly. But what the markets are saying is that there is simply no prospect of the ECB starting to raise rates for the foreseeable future.

Of course financial markets can be completely wrong. Look at bank shares in 2006. But the advice for both borrowers and savers is to get used to the world of low rates because it ain’t going to end any time soon.

For depositors, savings rates remain painfully poor. For as long as inflation is low that is not too much of an issue, but the game for deposit savers is to decide if they want a small bit more in return for locking up their money up for a period. Or if they want to dip their toes into the riskier world of the markets or so-called “structured products” which offer some exposure to the markets, but at a cost. Indications from the marketplace are that most still put a premium on taking no risk and having access to their funds.

For borrowers, competition is finally starting to edge in to the market. Tracker rates are not probably going to go any lower – and even if the ECB cuts its main refinancing rate to zero it really would not make a lot of difference for most. But standard variable rates have started to edge down and the entry of Pepper and the promised entry of Frank Money will increase competition.

In the meantime the existing banks are trying to tie in customers via fixed rate products, fearing they might lose out to the competition and wanting to tie punters in just in case rates fall yet lower. Finally, it seems, the long-promised competition could be starting to benefit the mortgage holder.