The Bank of England’s interest rate has been low since the financial crisis. Is a rate rise on the horizon, and what can you do to protect the value of your savings?
For savers, the near decade since the financial crisis began has been a tough one. The Bank of England’s base rate is at an all time low of 0.25%, while banks and building societies are not able to offer rates that can keep pace with inflation.
And with deep uncertainties surrounding the UK’s exit from the European Union on the horizon, savers could be forgiven for wondering when this might change.
Why are interest rates low?
Interest rates are currently so low as a result of the financial crisis. Between April 2008 and March 2009, the Bank of England cut interest rates from 5.0% to 0.5%.
It also injected around £375bn into the economy through Quantitative Easing (QE) between 2009 and 2012 – essentially, a form of printing money.
The intention was that rates would begin to rise from these emergency low levels as the economy improved. But the Bank of England continually delayed raising rates and unwinding QE, arguing that despite improvements in the economy, the conditions weren’t yet right.
Then following the vote to leave the EU on 23 June 2016, the Bank of England took further action to support the economy. This included cutting the base interest rate to 0.25%, increasing the amount of QE and providing cheap funding to banks and building societies to help them lend.
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David Cutter, Group Chief Executive of Skipton Building Society, which publishes retiresavvy, believes these policies are now causing more harm than good for savers.
He argues that allowing banks and building societies to borrow from the Bank of England at low rates means they are less reliant on savers’ deposits for funding loans and mortgages, leading to them offering lower interest rates on saving accounts.
He says: “Ultra-low interest rates have distorted the housing market while penalising savers. Savers’ balances are currently not in demand because banks can instead borrow so cheaply from the Bank of England. This is why savings rates continue to fall.”
Is an interest rate rise likely?
Generally, central banks adjust the base rate of interest to control inflation and keep it at or close to a target of 2%. The decision to change rates depends on balancing a range of economic factors, including employment and wage growth, business investment, private borrowing such as mortgages, as well as the headline rate of inflation.
The Bank of England’s Monetary Policy Committee (MPC), which sets interest rates, has said inflation “could rise above 3% by the autumn” as a result of the UK voting to leave the EU and the pound falling in value. Inflation is expected to remain above the 2% target “for an extended period”.
The MPC says it is willing to accept a period of higher inflation because raising rates to bring this under control would likely result in rising unemployment and weaker economic growth.
But the minutes from the MPC’s June meeting also say members voted by a majority of 5 to 3 to maintain the Bank Base Rate at 0.25%, the strongest vote in favour of raising rates for some time.
The MPC minutes note that continued employment growth could suggest there is less spare capacity in the economy, meaning it is less likely to tolerate above-target inflation and may move to raise rates, depending on the wider economic outlook.
Despite this, the MPC also states that it expects any increases in the base rate would be “at a gradual pace and to a limited extent”.
To get a clue as to how rates may rise, you have to dig into the Bank of England’s May inflation report. Buried towards the back is a chart comparing the market expectation of interest rates with those of outside forecasters such as economists and other experts.
The market expectation of rates is to rise from 0.25% at present to 0.5% by the middle of 2020, while external forecasters expect rates to rise to 0.9% by this time. It’s important to point out though that this is based on economic assumptions that are subject to change and shouldn’t be relied upon when making decisions about financial planning.
What can I do?
A base rate rise might be on the horizon, but when and by how much is unknown. So it’s important to make the most of your savings.
Generally speaking, fixed rate or fixed term savings products offer higher interest rates than easy access products, but you need to be willing to lock your money away – usually for between one and five years.
If you are willing to take a degree of risk with your money and are able to commit to a longer time-frame, you might consider taking financial advice.
A review with an expert financial adviser can identify where your money could work harder for you, help guide you through your options and offer tailored recommendations based on your own circumstances.
Skipton Building Society offers a range of fixed rate and fixed term savings products, as well as financial advice. To find out more about what Skipton can do for you, get in touch.
Our recommendations are likely to include stock market-linked investments. These are not like building society savings accounts as your capital is at risk and you may get back less than you invested. The value of your investments and any income from them may fall as well as rise.
Retiresavvy is brought to you by Skipton Building Society. This article has been commission by retiresavvy and any opinions voiced are the author's own