• Charles White Thomson, CEO at Saxo UK


• 09.10.2023 09:30 am
#banking #monetarypolicy

Inspiration for me appears in unusual places – Weird Barbie, Pink Floyd and the art of the Rugby Drop Goal to name but a few. This time, however, the well lived tones of Miley Cyrus and her song, Wrecking Ball, caught my attention.  I have been reflecting on the highly damaging era of rock bottom interest rates and quantitative easing (QE).  The purveyors of ‘nanny finance’ and free or super cheap money unleashed a financial time bomb into main street whose damaging shock waves will be felt for many years to come. The consequences of the noble but misguided desire to play financial superhero and save, protect, bail out all with industrial scale liquidity, include rampant inflation, asset bubbles, excess speculation, a generation of individuals and companies with a skewed attitude to risk or the value of money and a cost-of-living crisis as previously seen cheap debt becomes expensive. The counter argument would have prevented a deep and debilitating global recession. 

My preference is a less reactive world where Central Bankers have a lighter touch.  The monetary pendulum should have a gentler swing. As the economy slows or uncertainty emerges, the move to cut rates is a gradual one and as the economy heats up, a subtler raising of the rates takes place. This gentle swing is in tune with the natural ebbs and flows of the economy and the operators or central banks exude confidence supported by well-timed hints and thoughts to guide us all.  Better to encourage and cajole than to handle the interest rate pendulum lever.  So, this is what good looks like to me - even in the face of unanticipated shocks.

And now to reality. Historically we have seen and most probably will continue to see Central Banks hike and cut rates too much. This is driven in part by group think amongst the Economist fraternity and an over reliance on models, doctrine, and teaching.  Currently, the monetary pendulum is and has been in full flight, swinging from one side to the other at breakneck speed – full stimulation to almost entire tightening in a short period.  Indeed, the UK interest rate gauge has moved from 10bp to 525bps over two years. This is more like a wrecking ball than the preferred gentle swing. Sticking with the analogy, the Crane Operators or Central Bankers appear rattled, grimacing, pushing, and pulling the interest rate lever with gusto, sapping consumer, and spectator confidence. This is a battle royal where the credibility of the Central Bankers is also under review.  Slowing the arc of the monetary pendulum once it gathers this sort of speed is part judgement and part luck and damage has been and will continue to be done including a consumer recession in the face of expensive debt. A GBP 350,000 mortgage with 90% LTV with an interest rate at 2% when property appreciates at double digit percentage growth per year is a very different experience to the same mortgage when interest rates are at 6.5% with a property value that falls 5% a year.

There have been few consistent winners through this cycle except for the very well off with paid for properties and portfolios of financial and physical assets.  For the rest it has been a roller coaster seemingly ending in a reversal of fortunes. Simply put, with very low rates, savers were punished, and borrowers were rewarded on the condition they paid off the debt. As we approach peak rates, savers are earning a healthy yield, if not real in the face of inflation, and borrowers are saddled with or are buying expensive debt. The super low interest rate period was just long enough to ingest a meaningful part of the population and make real assets expensive.  The perceptive members of the younger generations rocked by this volatility will rightly look at this ‘cocktail’ of high taxes, low growth, large debt, expensive real assets and a shrinking labor force with exasperation and increasing anger. 

What can we do next? Now is a good time to review the monetary policy of the UK with a focus on lessons learned so we don’t make the same errors. It is the right time to acknowledge the wins and the hard decisions that were made in a very difficult period.  This will require open minds and careful consideration including an active involvement of generalists to challenge the status quo and established group think.  Sticking with the crane operator’s analogy, this is not a time for Central Banks to hide behind the operating manuals or doctrine. For this reason, I considered the appointment of Ben Bernanke (former Fed chair) to lead a review into the Bank of England’s forecasting and related processes during times of significant uncertainty as, sadly, more of the same. Going forward an open-minded and gentler hand is what is required with less wrecking ball.