The Bank of England’s Monetary Policy Committee (MPC) has unanimously agreed to keep the base rate at 0.25%, its lowest-ever level.
The members of the MPC also agreed to carry on with its current quantitative easing (QE) programme, under which the Bank will buy up £10 billion worth of corporate bonds, and £60 billion of UK government bonds, in an attempt to get money flowing through the economy.
Base rate fell from 0.5% to 0.25% last month – the first change in six and a half years. At the time the Bank also voted to increase its bond-buying scheme to current levels, to stave off a post-Brexit economic slump.
Nick Dixon, investment director at Aegon, says: “A further rate change was never really on the cards – and encouraging signals from recent trade and employment data suggest resilience in the UK economy. We remain of the view that inflation will start to rise during the final quarter of 2016, leading to a rate increase in the first half of 2017.”
Experts have tipped inflation to reach 3% over the next year, although a recent poll of Moneywise.co.uk users found that the majority of readers expect base rate to remain at 0.25% for the foreseeable future.
Savers warned rates will remain lower for foreseeable future
Savers however are paying the price for such cheap debt, and one expert predicts that this won’t change “any time soon”.
Calum Bennie, savings expert at Scottish Friendly, says: “Savers shouldn't expect a bounce back in rates any time soon. People need to be prepared for the ‘lower for longer’ interest rate environment and be sure that they are not simply leaving their money stashed away in cash accounts losing value as inflation climbs upwards.
“With returns on cash accounts so low, and remaining this way for the foreseeable future, savers mustn't sleep walk into leaving or switching long term investments in cash.”
Earlier this week, Richard Woolnough, one of the UK’s most successful bond investors, highlighted how savings accounts currently deliver better returns than investment bonds. But as savings accounts offer much more security than investment bonds, they shouldn’t be able to offer higher returns, suggesting savings rates have even further to fall.
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Pensions under pressure
The Bank’s on-going bond scheme is also hurting pensioners, pushing annuity rates down to the lowest levels on record. While you might have got £10 a year for every £100 in your pension savings a decade ago, these rates have been sliding since for several years, so much so that you’d be lucky to get £5 a year for every £100 in your pension.
Tom Stevenson, investment director at Fidelity Personal Investing says: “It seems every time anybody suggests annuity rates can’t go any lower then they lurch south again. At the moment, the best rate for a 65-year-old seeking a level guaranteed income for life is not much over 4.5%, having been around 5.9% a year ago.
“For those retirees looking for guaranteed income streams to cover essential expenses [in retirement], they should not dismiss State Pension Deferral, buying addition state pension entitlement, or getting an estimate on income from any final salary scheme.”