I have a sneaky suspicion that savers could be in for a better year in 2017
I might be wrong – it’s part and parcel of being an opinionated personal finance journalist. But my crystal ball is telling me that the worm is about to turn in savers’ favour.
The era of low interest rates, which has underpinned western world economies since the 2008 fi nancial crisis, is slowly drawing to an end. When rates start rising, savers should begin to see the interest on their cash balances pick up.
Not by a lot but, given the pain that savers have been through in the past eight years, we should be grateful for any small mercies that come our way.
My more upbeat take on the savings market is based on economic, political, regulatory and competitive factors.
First, as we steer ever so slowly to the Brexit door, there is no doubt that Bank of England Base Rate at an all-time low of 0.25% is unsustainable. Inflation, imported from abroad on the back of a weak pound, is on the march again.
Although inflation is running at 1%, most economic gurus (even those at the Bank of England) are forecasting that it could jump to 2.7% by the end of 2017.
This inflation threat has already persuaded the great and good that sit on the Bank of England’s Monetary Policy Committee (MPC) – and determine the level of Base Rate – to dismiss any idea of further cuts. These were being actively discussed in the wake of the Brexit vote and the MPC’s August decision to halve the Base Rate to 0.25%.
While less than a year ago negative interest rates were being talked about, now all the chatter is about when Base Rate will rise. The fact that the cost of new mortgages is edging up is a sure fi re sign that interest rates have bottomed out.
Of course, if Base Rate does increase, it will not be automatically translated into higher savings rates. Banks and building societies are notorious for being tardy when it comes to passing on any benefit of a change in Base Rate to savers. But they will come under pressure to show savers a little kindness, given the rough deal they have handed out to them in recent years.
Politically, it seems that Prime Minister Theresa May is determined to give savers a little more cheer. Her Chancellor, Philip Hammond, has already revealed patchy details of a new savings product from National Savings & Investments that will be launched in the spring.
It is likely to pay 2.2% annual interest, fi xed for three years (see page 21). Although the maximum investment of £3,000 is hardly generous, this new product may force some savings institutions to respond with more generous offerings of their own.
Regulatory changes should also help savers in 2017, as banks and building societies are required to inform customers of rate changes and the ending of special introductory deals (a short-term rate bonus, for example).
This greater openness should encourage more savers to switch accounts in order to earn more interest. It should also encourage customers of the big traditional high street banks to consider the raft of new challenger banks in the market. Some are making a mark with better than average rates – the likes of Hampshire, Ikano, Masthaven, Paragon, RCI and Vanquis spring to mind.
What is my savings battle plan in 2017? For a start, I will be using as much of my tax-free individual savings account (Isa) allowance as possible – £15,240 in the tax year to April, £20,000 in the new tax year beginning 6 April – to shelter my savings from the taxman.
Rather than relentlessly chasing best rates, I will be sticking to those providers that show me a little TLC. Whether it is through stellar customer service (Metro Bank) or rewarding my loyalty with occasional ‘special’ savings deals (Nationwide Building Society).
I am sure that if other banks invested in quality customer service, they would reap the benefits. Finally, I’ll keep my eagle eye on the steps individual banks are taking to counter the mounting threat of fraud.
Tesco Bank was found wanting in 2016 when fraudsters raided the accounts of 9,000 of its customers. Let’s hope my crystal ball is right and that 2017 is a year of cheer – not despair – for savers.
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.
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).