Official Interest Rates

Official Central Bank (Federal Reserve) interest rates are beginning to rise in the US and this is a positive reflection of a growing US economy. A more encouraging sign is that official rates are expected to rise further in 2017 – perhaps by as much as 1.0%. This is a very welcome development. Borrowers will no doubt complain but in the overall scheme of economic cycles rising interest rates signal underlying economic growth and a return of modest inflation. This is good!

The really big difficulty the Federal Reserve faces is that its interest-rate tool is a very blunt instrument in influencing economic behaviour. At its core, rising interest rates are intended to sway consumers and companies to invest more and to borrow less. However, the full effect of an interest-rate increase will take some 12 months to filter through to the whole economy. This means that the Fed will be unsure whether its first rate increase is working as it deliberates on its second and subsequent increases. In addition, the Fed won’t know for sure whether the economy is benefitting from its interest-rate policy or from President Trump’s new initiatives. It’s all fairly nebulous and not at all as clear as some market commentators appear to suggest.

In the normal course, Europeans might expect developments in the US to spill over into our own economies this year – but these are not normal times in Europe. It is very likely that the European Central Bank will continue to pursue its strategy of driving rates into negative territory in an increasingly desperate bid to stimulate the economies of Euroland. The precept of a negative return from interest rates is new and is untested in the modern world. Nobody knows for sure what the longer-term consequences of ECB actions will be but it is hoped they know what they’re doing. More and more, voters are having doubts.

Currently, a composite analysis of all existing AAA-rated government bonds in Euroland shows a negative yield up to a residual maturity of 7.75 years. This means that investors (pension funds; insurance companies and multi-nationals) are guaranteed to receive a negative pay-back on all shorter maturities. The business fall-out for insurance companies and pension funds could be catastrophic – no exaggeration!

In theory, the growing interest-rate differential between the US$ and the Euro should lead to a stronger dollar and a weaker Euro. This has already started to happen and could continue on throughout 2017. The vagaries of the foreign-exchange markets are notorious and we’ll devote a separate piece to currencies next week.

In the meantime, it looks as though interest rates are beating a different path in the US and Europe. This extreme divergence has not been witnessed since before the inception of the Euro in 1999. It means that the normal control valves that are present in symmetrical interest-rate cycles are unlikely to work – resulting in economic-performance disparities that globalisation all but eradicated. A resulting currency war is quite likely!

MMPI Business Initiatives

New Money LogoMMPI is delighted to announce a new business initiative that is designed to provide an even broader service offering from MMPI – New Money.

New Money is a new business name of MMPI concentrating on the provision of lending advice on residential home loans; buy-to-let mortgages; commercial mortgages; commercial bridging – and specialising in assisting first-time-buyers.

New Money has assembled a specialist team comprising Kevin Leahy – Director of Lending; Annette Moore – Head of Lending & Sales and Sam Ling – Financial Advisor.

This is an exciting development for MMPI and will provide a clear focus to our customers on the pathways through the maze of regulations, lender restrictions, legal complexities and other impediments associated with borrowing money. New Money has established relationships with all of the key lenders in the Irish market and has the ear of key decision makers. Nationwide advertising will be rolled out in the coming months. Details of this business initiative are available at

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