There is a generation of persons who only know what low interest rates mean. They have never experienced high interest rates. This applies to persons who have bought a house in the last year or who have taken a business loan during this period. This situation is likely to persist throughout this year and possibly till the end of 2016.

Low interest rates have contributed greatly to increasing disposable income, even if they have not come down as much as they have done in other countries. They have made credit easier, especially since the Maltese economy has continued to deliver interesting growth rates, inflation has remained around the one per cent level and wages have not really suffered any reduction.

The decision to apply quantitative easing across the eurozone has also meant an increase in liquidity. Add to that the tax reductions applied in Malta since 2013 and the disincentive to save provided by low returns, and it would come as no surprise that the Maltese have continued to spend, at times even beyond their means.

The low interest regime will not last forever. It is only a question of when and not if interest rates will rise

Such low interest rates have not been only good news. They have also been bad news to many, such as pensioners, who have seen their disposable income fall because of low savings rates as well as lowered interest rates for government bonds. The reaction of such people at the prospect of an increase in interest rates will probably be: “Bring it on”.

However, the low interest regime will not last forever. It is only a question of when and not if interest rates will rise. And when they rise it will represent good news for some but may well represent a shock for many. Are these persons ready for such a shock? They have never experienced the pain of an interest rate rise, which could well come when most of them could be starting families and facing the extra financial pressure of the loss of one parent’s salary. And what if all this happens when growth in Malta will slow down, even if slightly?

Admittedly, I may be referring to 18 months from now. Therefore it does not seem as if it is round the corner. Moreover, interest rates will rise modestly. On the other hand, being weaned off low interest rates could be as difficult as it has been for pensioners being weaned off higher rates for savings. So should people be planning ahead for these interest rate rises?

Partly joking and party seriously, should they go through a stress test of their finances to assess how such an increase in interest rates would affect them and if their level of borrowing is sustainable? Or should lenders take the initiative and take a longer term view than just the short term when lending money, especially to consumers, more than businesses.

It is worth noting that when businesses borrow money they are expected to provide cash flow projections, profit and loss projections, business plans, etc. It is not so with consumer credit and with house loans.

So what is the answer? Should we impose a credit crunch to discourage lending? No surely that cannot be the answer. The answer, as usual, lies at the human level at the technical level. Efforts should me be made by stakeholders (now that is a term which is as clear as mud) to ‘educate’ persons not to be lured by the current environment and not to borrow beyond one’s future means, as those future means are likely to be affected by an increase in interest rates.