Carney: Good or bad for savers and investors?
Edmonton is not one of the world's major cities. Sitting on the North Saskatchewan River in the Canadian province of Alberta, it's home to just over a million people. While Edmonton is most famous for its year-round cultural festivals - and is a good place to catch the splendour of the aurora borealis - it is also something of a hub for oil, gas and mining operations.
Perhaps it was these commercial activities that inspired a young Mark Carney, growing up in Edmonton, to build a career that has taken him, via Oxford University, Goldman Sachs and the Bank of Canada, to the highest profile role in British banking.
At the sprightly age of 48, Carney has become Governor of the Bank of England (BoE) and, just weeks into the job, has already set about getting to grips with the UK economy.
But what will his appointment mean for Britain's savers and investors?
When appointed governor of the Bank of Canada at the height of the global financial crisis in February 2008, Carney promptly slashed the overnight interest rate by 0.5 percentage points to boost the stuttering Canadian economy. The result? The economy outperformed its G7 peers and Canada managed to restore its GDP levels to pre-crisis levels quicker than anyone else.
Here, Carney has inherited the record low Bank base rate of 0.5%: a level Britain's consumers have had plenty of time to get used to - it's been at rock-bottom since March 2009.
This has been somewhat of a gift to homeowners, as they have enjoyed cheaper repayments on their mortgages, but savers and people dependent on an income from their savings (such as pensioners) have endured years of misery. The average savings account pays just 1.8%, so a pensioner with £10,000 worth of savings will generate just £180 a year before tax.
If Carney keeps the base rate low, that misery will continue. Unfortunately for savers, Carney's very first BoE statements indicates that he will indeed stick to the ultra-low interest rate model operated by his predecessor.
Carney has embraced a strategy known as 'forward guidance', where a central bank flags up what is expected to happen to interest rates way beyond its next policy vote. Carney's statement on 7 August means we already know a rate rise is unlikely in the short term. He said a rise will only be triggered should the unemployment rate hit 7% - it currently stands at 7.8% and is not forecast to drop to 7% until 2016 at the earliest.
"The BoE will not choose to raise rates until there is a positive wealth effect, such as from significantly higher stockmarkets," Coutts said.
Stuart Welch, chief executive of TD Direct Investing, said investors could benefit: "When you look at average returns on savings versus the FTSE 100's performance, it is easy to see where investors might be able to make gains."
During the reign of the BoE's previous governor, Sir Mervyn King, the FTSE rose by 52% from 3963 on 1 July 2003 to 6215 (at the close of play on 28 June). While markets clearly had their ups and downs during this time, Welch says this is more than one and half times the return an investor might have seen from an average savings account.
Sarah Lord, head of chartered financial planning at Killik & Co, says the outlook could continue to be grim for pensioners: "Since taking up his post, Carney has said that base rates are likely to remain low for some time, which is not a good thing for savers - in many cases it has had an impact on individuals' standard of living.
"Equally, the economic environment we have been in has also led to very low gilt yields which, in turn, has had an impact on annuity rates, which are at all-time lows. Therefore, individuals looking to take their pension benefits are receiving a lower income from their pension. The converse to this is that the low interest rate environment has aided the stockmarket as people look to get a return on their capital and, in particular, an income stream from dividends."
According to the deVere Group, Carney's arrival could "herald misery" for a million expat pensioners. The one million British retirees who live abroad and claim a UK state pension could be hit if Carney devalues the pound.
"We expect the Governor of the BoE to devalue the pound by up to 15%," says chief executive Nigel Green. "This would be another devastating blow for Britons overseas who live on a fixed sterling income. Many of these British retirees have, through no fault of their own, lost more than 20% of their income since the financial crisis hit - a problem that's been compounded by soaring living costs in most major expatriate destinations."
Anyone who lives abroad and whose primary income is a UK state pension has certainly been feeling the pinch - at the beginning of 2007, they typically received a rate of about 1.48 to the pound but this is closer to 1.16 now. Green says it is "likely to get worse before it gets better", especially as Carney has taken the above stance on monetary policy.
So the Canadian is potentially good news for investors and homeowners, but savers and pensioners might struggle.
But what do you think? We asked whether Carney will be good for your savings. The majority (70%) said he will not, with 49% saying he will look after those in debt instead and 21% claiming he wants to get people spending rather than saving. But one in five believes that if he gets the economy going, interest rates will rise and savers will benefit.
Whatever the outcome, a Canadian in the hot seat is certain to shake up the Bank of England.
The total money value of all the finished goods and services produced in an economy in one year. It includes all consumer and government consumption, government spending and borrowing, investments and exports (minus imports) and is taken as a guide to a nation’s economic health and financial well being. However, some economists feel GDP is inaccurate because it fails to measure the changes in a nation's standard of living, unpaid labour, savings and inflationary price changes (such as housing booms and stockmarket increases).
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
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.