Bank of England defies rate cut expectation: what it means for savers and borrowers
Eight of the nine panel members voted to hold the Bank of England’s base rate at 0.5%, with one member voting to cut rates to 0.25%.
Many, if not most, financial experts were expecting the Bank of England to cut the base rate to stabilise the economy in response to the UK’s recent decision to leave the European Union.
Hargreaves Lansdown said earlier this week that the markets were implying an 80% chance of a rate cut, while Blackrock said it anticipated a rate cut of between 0.25% and 0.5%.
Maike Currie, director for personal investing at Fidelity International says: “Much like the Brexit result, the Bank of England has defied market expectations by choosing to maintain interest rates at 0.5%.
However, rates could still fall in future and a rate cut in August can’t be ruled out, according to Adrian Lowcock of AXA Wealth.
He says: “The outlook for interest rates are still towards a further cut, possibly as soon as August, as early indicators point to weakening consumer and business confidence and a significant slowdown in activity in the housing market.”
What does it mean for savers?
Given the base rate has not moved for seven years now, no change may not seem significant to savers.
However, rates available on savings accounts have recently been hit hard as banks and building societies prepared for the expected rate cut. Earlier this week Moneyfacts reported that the average rate on one-year fixed rate savings accounts had fallen to 1.14%, down from 1.4% in January.
However, while the lack of a base rate cut may put the brakes on rate cuts to savings accounts in the short-term, the outlook for savers remains challenging.
Mr Lowcock says: “Savers continue to suffer from record low interest rates and will do so for some time to come. Things are likely to get worse with inflation expected to return as the recent rise in oil prices, but more importantly the fall in the pound drives up prices eroding the value of cash.
“Inflation is insidious as it slowly erodes the spending power of savings and since interest rates were cut to 0.5% in March 2009, an average cash account has already lagged behind inflation by over 11%.”
Ms Currie suggests cash savers may want to consider investing instead: “Savers and investors looking for a decent return on their investments, may need to move money further up the risk spectrum, investing in equities or the slightly more risky bonds issued by companies rather than governments.”
What does it mean for borrowers?
David Hollingworth, associate director at mortgage broker London and Country, says fixed rate mortgages, particularly long term deals, have already been falling in the run up to today’s announcement.
He says: “Fixed rates have already reacted to market expectations of rates staying lower for longer due to the uncertainty around Brexit. That has started to move into fix rate deals, particularly in the longer term, such as the launch of the new [record low] deal from Coventry Building Society.
“Eyes will now turn to August’s meeting to see if that might result in further loosening of monetary policy. Whether that turns into a rate cut remains to be seen, they might consider more quantitative easing (QE).”
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What does it mean for retirement savers?
Ms Currie says that the base rate holding at record low levels is an indication of fundamental changes to the world of pension saving.
She says: “The rules of retirement are changing. The sooner you can start to save into a pension the better – lower for longer returns mean you will need the benefit of time and compounding to build up a decently sized pot. Those nearing retirement will also need to rethink their pension planning.
“Low investment returns mean people may want to think about staying in riskier asset classes for longer as they approach retirement to get better returns, she adds.
“Traditionally, as you moved closer to pension age you would de-risk your retirement portfolio by moving assets from equities into less risky bonds to preserve wealth. However, with the income from bonds hovering near zero or below, there may be merit in sticking with higher returning equities for longer.”
Lower interest rates encourage people to spend, not save. But when interest rates can go no lower and there is a sharp drop in consumer and business spending, a central bank’s only option to stimulate demand is to pump money into the economy directly. This is quantitative easing. The Bank of England purchases assets (usually government bonds, or gilts) from private sector businesses such as insurance companies, banks and pension funds financed by new money the Bank creates electronically (it doesn’t physically print the banknotes). The sellers use the money to switch into other assets, such as shares or corporate bonds or else use it to lend to consumers and businesses, which pushes up demand and stimulates the economy.
Changing mortgages without moving home. Property owners chiefly remortgage to get a better deal but some do so to release equity in their homes or to finance home improvements, the costs of which are added to the new mortgage. Even though you’re not moving house, you still need to engage solicitors, conveyancing and the new lender will require the property to be surveyed and valued.
Monetary Policy Committee
A committee designated by the Bank of England to regulate interest rates for the UK. The MPC attempts to keep the economy stable, and maintain the inflation target set by the government and aims to set rates with a view to keeping inflation at a certain level, and avoiding deflation. The MPC meets on the first Thursday of each month and discusses a variety of economics issues and constitutes nine members: the governor, the two deputy governors, the Bank’s chief economist, the executive director for markets and four external members appointed directly by the Chancellor.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).