Miranda Lane offers a brief explanation of why interest rates are so low (and even negative in some markets).

A couple of years ago, we expected interest rates to start to rise as the global economy recovered from the after-effects of the financial crisis and started to grow again.  However, 2 years down the line, there are still serious doubts about growth.

The US and the UK are growing at around 2%.  The Eurozone is not growing. China is growing much more slowly and there is lots of talk about a possible debt crisis. India is growing but this is not enough to drive the world economy.  The other countries that we relied on previously were Brazil (now in recession) and Russia (suffering from sanctions re Ukraine and low oil prices).

Further evidence for lack of long-term growth can be seen in the commodities market where prices are very low (suggesting lack of demand, particularly from places like China).   Oil prices are also ultra-low which is probably partly due to lack of demand, partly over-supply.

Following in the footsteps of the USA and the UK, the Eurozone is now in the midst of a quantitative easing (QE) programme. Japan is also doing QE.  The impact of this is to drive bond prices up (central banks buy high quality government and corporate bonds, which pushes up prices).  Higher bond prices means that the coupon (interest payment) looks lower as a % of the value so it pushes the yield (the effective interest rate) down.   

The idea is that low interest rates should stimulate the economy by encouraging investment.  It doesn’t seem to be working very well as the lack of global growth combined with general economic uncertainty are not a proving to be a compelling backdrop for investment.

However, on the other hand, ultra-low interest rates are very bad for savers and long-term may create a bigger problem with pensions than we already have.

The other aim of QE is to weaken the currency (e.g. the Euro) as it makes investment in Euros less attractive than, for example dollars.  However, if many countries implement QE, it becomes a zero sum game (and there is talk in the markets about the US actually implementing further QE instead of raising interest rates further as we expected a few months ago).

In many countries interest rates are now negative, not just short-term interest rates but up to 10 year money (e.g. Swiss and Japanese 10-year government bonds). Fitch Ratings estimates that there are currently around $10tn of negative yielding government bonds, costing investors about $24bn annually.

This is a problem for businesses that need to invest regularly in bonds (e.g. life insurance companies and pension funds).  Of course the bonds that such companies bought some time ago will still be paying the coupon that was available at the time of purchase, but new bonds will be paying nothing or worse!

Here is a link to a good FT article on negative interest rates: