Bank of England holds interest rates at 0.25%
The members of the MPC also agreed to carry on with its current quantitative easing (QE) programme, under which the Bank will buy up £10 billion worth of corporate bonds, and £60 billion of UK government bonds, in an attempt to get money flowing through the economy.
Base rate fell from 0.5% to 0.25% last month – the first change in six and a half years. At the time the Bank also voted to increase its bond-buying scheme to current levels, to stave off a post-Brexit economic slump.
Nick Dixon, investment director at Aegon, says: “A further rate change was never really on the cards – and encouraging signals from recent trade and employment data suggest resilience in the UK economy. We remain of the view that inflation will start to rise during the final quarter of 2016, leading to a rate increase in the first half of 2017.”
Experts have tipped inflation to reach 3% over the next year, although a recent poll of Moneywise.co.uk users found that the majority of readers expect base rate to remain at 0.25% for the foreseeable future.
Savers warned rates will remain lower for foreseeable future
Savers however are paying the price for such cheap debt, and one expert predicts that this won’t change “any time soon”.
Calum Bennie, savings expert at Scottish Friendly, says: “Savers shouldn't expect a bounce back in rates any time soon. People need to be prepared for the ‘lower for longer’ interest rate environment and be sure that they are not simply leaving their money stashed away in cash accounts losing value as inflation climbs upwards.
“With returns on cash accounts so low, and remaining this way for the foreseeable future, savers mustn't sleep walk into leaving or switching long term investments in cash.”
Earlier this week, Richard Woolnough, one of the UK’s most successful bond investors, highlighted how savings accounts currently deliver better returns than investment bonds. But as savings accounts offer much more security than investment bonds, they shouldn’t be able to offer higher returns, suggesting savings rates have even further to fall.
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Pensions under pressure
The Bank’s on-going bond scheme is also hurting pensioners, pushing annuity rates down to the lowest levels on record. While you might have got £10 a year for every £100 in your pension savings a decade ago, these rates have been sliding since for several years, so much so that you’d be lucky to get £5 a year for every £100 in your pension.
Tom Stevenson, investment director at Fidelity Personal Investing says: “It seems every time anybody suggests annuity rates can’t go any lower then they lurch south again. At the moment, the best rate for a 65-year-old seeking a level guaranteed income for life is not much over 4.5%, having been around 5.9% a year ago.
“For those retirees looking for guaranteed income streams to cover essential expenses [in retirement], they should not dismiss State Pension Deferral, buying addition state pension entitlement, or getting an estimate on income from any final salary scheme.”
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.
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.
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.
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.
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).