Bank of England defies rate cut expectation: what it means for savers and borrowers

Tom Wilson
14 July 2016

The Bank of England’s monetary policy committee has decided to hold the base rate at its record low of 0.5%, despite widespread market anticipation of a rate cut.

Eight of the nine panel members voted to hold the Bank of England’s base rate at 0.5%, with one member voting to cut rates to 0.25%.

Many, if not most, financial experts were expecting the Bank of England to cut the base rate to stabilise the economy in response to the UK’s recent decision to leave the European Union.

Hargreaves Lansdown said earlier this week that the markets were implying an 80% chance of a rate cut, while Blackrock said it anticipated a rate cut of between 0.25% and 0.5%.

Maike Currie, director for personal investing at Fidelity International says: “Much like the Brexit result, the Bank of England has defied market expectations by choosing to maintain interest rates at 0.5%.

However, rates could still fall in future and a rate cut in August can’t be ruled out, according to Adrian Lowcock of AXA Wealth.

He says: “The outlook for interest rates are still towards a further cut, possibly as soon as August, as early indicators point to weakening consumer and business confidence and a significant slowdown in activity in the housing market.”

What does it mean for savers?

Given the base rate has not moved for seven years now, no change may not seem significant to savers.

However, rates available on savings accounts have recently been hit hard as banks and building societies prepared for the expected rate cut. Earlier this week Moneyfacts reported that the average rate on one-year fixed rate savings accounts had fallen to 1.14%, down from 1.4% in January.

However, while the lack of a base rate cut may put the brakes on rate cuts to savings accounts in the short-term, the outlook for savers remains challenging.

Mr Lowcock says: “Savers continue to suffer from record low interest rates and will do so for some time to come. Things are likely to get worse with inflation expected to return as the recent rise in oil prices, but more importantly the fall in the pound drives up prices eroding the value of cash.

“Inflation is insidious as it slowly erodes the spending power of savings and since interest rates were cut to 0.5% in March 2009, an average cash account has already lagged behind inflation by over 11%.”

Ms Currie suggests cash savers may want to consider investing instead: “Savers and investors looking for a decent return on their investments, may need to move money further up the risk spectrum, investing in equities or the slightly more risky bonds issued by companies rather than governments.”


What does it mean for borrowers?

David Hollingworth, associate director at mortgage broker London and Country, says fixed rate mortgages, particularly long term deals, have already been falling in the run up to today’s announcement.

He says: “Fixed rates have already reacted to market expectations of rates staying lower for longer due to the uncertainty around Brexit. That has started to move into fix rate deals, particularly in the longer term, such as the launch of the new [record low] deal from Coventry Building Society.

“Eyes will now turn to August’s meeting to see if that might result in further loosening of monetary policy. Whether that turns into a rate cut remains to be seen, they might consider more quantitative easing (QE).”


What does it mean for retirement savers?

Ms Currie says that the base rate holding at record low levels is an indication of fundamental changes to the world of pension saving.

She says: “The rules of retirement are changing. The sooner you can start to save into a pension the better – lower for longer returns mean you will need the benefit of time and compounding to build up a decently sized pot. Those nearing retirement will also need to rethink their pension planning.

“Low investment returns mean people may want to think about staying in riskier asset classes for longer as they approach retirement to get better returns, she adds.

“Traditionally, as you moved closer to pension age you would de-risk your retirement portfolio by moving assets from equities into less risky bonds to preserve wealth. However, with the income from bonds hovering near zero or below, there may be merit in sticking with higher returning equities for longer.”

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