The Bank of England’s Monetary Policy Committee (MPC) has unanimously voted to keep the Bank’s base rate at 0.5%, amid economic uncertainty surrounding the forthcoming referendum on the UK’s membership of the European Union.
Base rate has now stood unchanged at 0.5% for a whopping 85 months in a row - it first fell from 1% in March 2009.
The MPC says it judged it “appropriate to leave the stance of monetary policy unchanged”, as the effects of the referendum are “likely to make macroeconomic and financial market indicators harder to interpret” and it’s therefore “likely to react more cautiously to data news over this period than would normally be the case”.
Maike Currie, investment director for personal investing at Fidelity International, says holding the base rate at 0.5% comes as no surprise. “With the IMF downgrading its UK growth forecast, uncertainty over the UK’s fate in the European Union, low inflation and stuttering growth, this comes as no big surprise”, she comments.
However, the MPC continues to warn that base rate will need to rise eventually to ensure inflation returns to its target.
The consumer prices index (CPI) rose to 0.5% in March, but it still remains well below the Bank’s the 2% inflation target.
Andrew Wilson, head of investments at Towry, says: “The Bank of England won’t want to act until after the EU Referendum, and how it acts will completely depend on the result.”
While Ben Brettell, senior economist at Hargreaves Lansdown adds: “Continuing weak inflation - despite Tuesday’s bigger-than-expected jump to 0.5% - puts no pressure on the MPC to raise rates. Furthermore there are growing concerns that the economy is stuttering.”
The MPC says it expects any base rate rise to happen “more gradually and to a lower level then in previous cycles”.
Good news for mortgage borrowers, but bad news for savers
The news that base rate will be kept at 0.5% will be welcomed by mortgage borrowers whose deals are tied to the base rate.
But Calum Bennie, savings expert at Scottish Friendly, says it’s “grim news” for cash savers, with savings deals continuing to be pulled and rates slashed.
He recommends savers consider investments to beat poor paying interest accounts. “Stocks and shares Isas offer the opportunity to grow money over the long-term, and although risk is attached, savers need to have these products on their radar in order to be able to gain from the returns they can offer.”
Ms Currie supports this view, adding: “If you’re unsure about the benefits of investing in the stock market over hoarding cash, our calculations show that if you had invested £15,000 into the FTSE 250 index 10 years ago you would now be left with £33,925.
“If, however, you had invested £15,000 into the average UK savings account over the same period, you would be left with a paltry £16,036. That’s a difference of £17,889 – far too big for anyone to ignore.”