Bank of England cuts base rate to 0.25%: what it means for your finances
In a long-expected move, the Bank of England (BoE) has today announced a cut to the UK base rate, taking it from 0.5% to 0.25% - the lowest it’s ever been.
It’s the first time the base rate has changed since March 2009, when it dropped from 1% to 0.5%.
As well as a cut to base rate, in a bid to stimulate the faltering economy the Bank of England has announced it will purchase further UK government bonds to the tune of £60 billion - otherwise known as Quantitative Easing (QE) - alongside £10 billion of corporate bonds.
Among this news was a gloomy prediction for the coming year as the BoE cut its growth forecast for 2017 from 2.3% to 0.8%.
Today’s interest rate cut is bad news for savers as it’ll likely mean savings rates plummet even further. This is because a low base rate means banks can borrow money from the Bank of England extremely cheaply, which in turn means they don’t have to fight for your deposits by competing with eachother over the best deals.
Cash savings returns are already paltry – a third of easy-access accounts offer rates lower than 0.25%, according to website Savings Champion – and with the reported threat of negative interest rates for business accounts on top of this, many will be looking for new places to deposit their cash, or even new ways of saving it. Furthermore, a further £100 billion of cheap funds will be made available to banks, giving them even less reason to offer decent rates.
Calum Bennie, savings expert at Scottish Friendly, says: “Any false sense of security around the outlook for savers post-Brexit has now been removed. It’s particularly ironic that this move is most likely to affect the cash savings of the over 60s, the demographic that were among the most in favour of leaving the EU.”
For those looking to make their cash work harder, investing may be a better option for maxing returns. Many Moneywise readers say they are already using peer to peer lending to get better interest on their money. Others will be looking to start investing for income. See the Moneywise First 50 Funds guide for the best place to start.
Lower interest rates will however be a boon to mortgage borrowers on a tracker deal, as these typically rise and fall in line with the base rate.
Hannah Maundrell, editor in chief of money.co.uk, says: “The only people guaranteed to benefit are those on tracker mortgages. It’s likely to save you about £34.95 a month (around £420 a year) on a 25 year £170,000 mortgage.”
Peter Harrison, director of money at MoneySuperMarket adds: “The biggest positive change is likely to be felt by the millions of first time buyers in the UK, especially those on tracker mortgages, who’ve bought their house in the past seven years and therefore have never experienced a rate change.”
However, Tashema Jackson, money expert at uSwitch.com, warns: “It remains to be seen if the banks will pass the benefit of lower rates on to other mortgage customers.”
It is worth bearing in mind that first-time buyers will still need a deposit, and with saving rates being what they are, this will take even longer to accrue than it did before.
Steven Cameron, pensions expert at Aegon doesn’t beat around the bush when he says: “The further cut in interest rates means now is probably the worst time ever to be making a retirement decision, with those buying an annuity today locking in to super-low returns for life.”
Annuity rates have already plummeted post-Brexit, if you’re thinking of taking one out, experts have warned that it may be better to act sooner rather than later. However, remember to always shop around – you’re unlikely to get the best deal simply by accepting the one offered to you by your pension provider.
Gareth Shaw, head of consumer affairs at Saga Investment Services, says: “Anyone looking to generate a decent, regular income from their savings will now find their money flailing in a flatlining market.
“Retirees in particular must now be thinking about moving up the risk ladder with their savings to help deliver the income they need. Some 81% of over 65s with an individual savings account (Isa) hold their savings in cash and its clear this will no longer suffice. They should now be considering building a diverse portfolio of shares and bonds, which can help pensioners find the yields they need.
“This doesn’t mean piling all your money into the stock market. Our research suggests that a small shift of 10% of your money from cash products into financial assets could boost income by 76%. A stocks and shares Isa isn’t just the preserve of sophisticated traders with millions to blow – you can invest small amounts to start off with and see what a difference it could make to your finances.”
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.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
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.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
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.
Corporate bonds are one of the main ways companies can raise money (the other is by issuing shares) by borrowing from the markets at a fixed rate of interest (the reason why they are also known as “fixed-interest securities”), which is called the “coupon”, paid twice yearly. But the nominal value of the bond – usually £100 – can fluctuate depending on the fortunes of the company and also the economy. However it will repay the original amount on maturity.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.