What has Climate Change got to do with Interest Rates?

Here’s a question for you to get the brain juices flowing. How long ago was the last Ice Age?

a) 8,000 years ago

b) 120,000 years ago

c) 1 million years go

OK, its a trick question because technically they are all wrong. Why? Because we are still in an Ice Age. Albeit towards the latter end of it, but an Ice Age all the same. That is why we get to go skiing and Eskimos live in igloos.

Climate change as we all know is the single biggest threat to our civilisation (remember when it was still called global warming? Even catastrophe’s get a branding makeover these days). The basic premise being that the earths temperature will rise, the ice will melt, and we will go the same way as the dinosaurs.

As Al Gore points out to us, if you look at a graph of the earths temperature over the last 100 years there is a definite upward trend. We all know the reasons why and the evidence is hard to ignore. Even the scientific community are in general agreement.

More importantly civilisation as a whole has embraced the concept and the challenge that lies ahead, to the extent that ‘non believers’ are the minority. Anyone who has had the audacity to ask for a plastic carrier bag at the supermarket checkout and been made to feel like they had just clubbed a seal to death in front of a primary school outing will agree.

If however the graph is extended to 65 million years it paints a different picture. Historically the earth has on average been much warmer than it is today. In fact during the Paleocine Epoch the oceans were between 10 and 15 degrees Celsius.

OK so what does this have to do with interest rates you may ask? The link is that in the current economic climate (did you see what we did there?) we have the lowest interest rates since economic time began. Which is very nice if you borrow and not so nice if you save.

There can be a feeling however, that when offered a shiny new fixed mortgage rate at about 4-5%, that it’s a little bit high. Surely we think, it should be in the region of 3%. To be fair, if the lenders weren’t increasing their margin to pay for all the bailouts then it probably would be, but that’s for another article.

If we go back to the early nineties when interest rates were on a bit of a rollercoaster the definition of ‘normal’ was somewhat different. Some of you may remember the time when you sat in front of the news waiting for the next interest rate announcement with a mortgage statement in one hand, a calculator in the other and the homeless shelter on speed-dial.

One client we came across, which in the interests of confidentiality we shall refer to as Mr Lucky, had taken a 15 year fixed rate at 13.5% because at the time, it was better than ‘normal’ and he thought that interest rates were going to continue to go up. Had he been offered a 5% fixed rate then he would probably have traded in his family to secure it.

The point that we are stumbling towards is that the perception of what is ‘normal’ can be skewed depending on the time period it is compared against. In Ice Age terms the temperature of the earth is currently below ‘normal’ and it can rise quite a bit and will still be below ‘normal’, although it will have wiped out mankind in the process, which is unfortunate.

The average interest rate over the last ten years or so has been relatively low and this is what we deem to be ‘normal’. If we widen the scope to thirty years however, then current and recent interest rates are abnormally low.

So if you are perusing your next mortgage deal and feeling a little bit disappointed about what is on offer then it may be worthwhile refocusing your benchmark by looking back more than the last ten years for a comparison to ‘normal’. Just ask Mr Lucky.