Base rate set to stay at 0.5% for three years - what can you do?

7 August 2013

The Bank of England (BoE) will hold interest rates steady at 0.5% until the unemployment rate falls to 7%, governor Mark Carney has announced.

Carney was making his first speech using the principle of "forward guidance", where the BoE sets out a longer-term view of interest rate movements.

UK unemployment is currently running at 7.8% and it is expected to take another three years before it falls to 7%.

Commenting on Carney's statement, Patrick Connolly, certified financial planner at Chase de Vere, said: "UK interest rates have been at a record low level of 0.5% for more than four years and in that time cash savers have suffered from returns considerably below the rate of inflation, meaning they have been losing money in real terms."

He pointed out that with the Consumer Prices Index (CPI) measure of inflation at 2.9%, a taxed savings account for a basic-rate taxpayer would need to exceed 3.625% gross a year to provide a real return. For a higher-rate taxpayer the interest rate on their savings account would need to be greater than 4.83% and for an additional-rate taxpayer this increases to 5.27% a year.

"The ongoing dilemma for savers is whether to accept that the spending power of their money is continuing to fall or take more risk in the hope of generating better returns," he said.

Find the best Cash ISA or savings Account for you

So what can savers and investors do to combat inflation and low interest rates?

"The most cautious investors should remain in cash, regularly reviewing their accounts to ensure they are earning competitive rates of interest," Connolly suggests.

"They should also use their annual cash Isa allowance, which for 2012/13 is £5,760. Saving in a cash Isa ensures that all interest is tax-free and doesn't have to be declared on a tax return."

Although there isn't one type of investment or asset class available where you can be sure of protecting your money and beating inflation, Connolly suggests those more comfortable taking some risk to generate real returns invest in a range of different asset classes including equities, fixed interest and property "in the right proportions to suit your circumstances, financial objectives and attitude to risk".

"This approach should provide you with a good degree of diversification and the growth potential to beat inflation over the medium to long term. However, of course, you run the risk that the value of your investments could fall in both real and absolute terms."

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