‘Interest rates now aren’t high… the reality is we’ve had it incredibly easy’ says EBC CEO

David, you said in the latest issue of World Finance that interest rate increases are the most significant trend affecting liquidity today – could you tell me more about that?

David Barrett: Yeah, I think in a year where we’ve had an awful lot going on: AI has been a predominant headline, if you look at what’s gone on in crypto, you look at what’s gone on in world markets in general – you know, the US had three bank failures in March. There’s been a lot going on, but I think the predominant driver and influencer on all of those things has been US rates.

We’ve had a significant increase over the last 12 months, and even last night we had another increase from the Fed, although many people think that’s probably enough. I think rates have influenced and dominated the movement in almost every corner of the market.

We’ve had a decade of near-zero rates – what kind of behaviours became normal in this incredibly long period of time?

David Barrett: Yeah, it was a long period of time! And I think if you look at why it came about, it was perfectly justified. I think the authorities at the time of the crash in 2007-8 – I actually think they did a fantastic job!

I worked at an institution in the middle of that, and it was clear to all of us there just how poor the conditions in the market were. But I think it went on for too long. The biggest problem the world has had is that it’s decided that low rates are the new normal and it would carry on forever – and that’s clearly not true!

I mean, rates now aren’t high. Rates are more like what we would consider an average over the past few decades. But compared to where a lot of industry has grown up in the last 10 or 15 years and has really developed and survived in an environment of low rates, it’s come as a massive shock.

So it’s not really that we’re entering a new standard – we’re entering the old normal again.

David Barrett: Yeah, I think it depends on who you ask. If you ask me, this is normal! Where we are now is much more like the normal that I could express as normal. I don’t think having artificially suppressed interest rates is a normal environment. I think it’s politically expedient! But it’s just not justifiable. And when you get something like inflation to come along, lower rates create a huge problem, and solving them, you have a pretty blunt toolbox.

You know, higher rates will work against inflation, it will solve it. Being a blunt tool it tends to break a few eggs as it’s going along, and we’re seeing that now. The consumer has been hit, but not perhaps as hard as you would think. You know, always it’s the lower end of the economic stack that gets hurt most. And if you look at the way that inflation has taken hold and you look at the things that are being affected by it, consumer confidence is only one of those things.

I personally don’t think inflation will go away quickly – if anything I think we’re actually clueing ourselves up to maybe a second round of inflation. And that would be very damaging for markets because they’re already trying to call a top on interest rates, they’re already predicting that the Fed’s going to start cutting at some point.

I personally am in the higher for longer and beware if we get more, camp. The causes of inflation this time are different, and I think that the solutions and the time it takes to get rid of it are going to be a lot harder than people want it to be.  The reality is that we’ve had it incredibly easy for a long while, and it’s not as easy. And I think part of the problem for people in general is accepting that things have changed – particularly if they change for the worse, and not for the better.