Carney: Good or bad for savers and investors?

Published by Mark King on 10 September 2013.
Last updated on 10 September 2013

Bank of England

Edmonton is not one of the world's major cities. Sitting on the North Saskatchewan River in the Canadian province of Alberta, it's home to just over a million people. While Edmonton is most famous for its year-round cultural festivals - and is a good place to catch the splendour of the aurora borealis - it is also something of a hub for oil, gas and mining operations.

Perhaps it was these commercial activities that inspired a young Mark Carney, growing up in Edmonton, to build a career that has taken him, via Oxford University, Goldman Sachs and the Bank of Canada, to the highest profile role in British banking.

At the sprightly age of 48, Carney has become Governor of the Bank of England (BoE) and, just weeks into the job, has already set about getting to grips with the UK economy.

But what will his appointment mean for Britain's savers and investors?

When appointed governor of the Bank of Canada at the height of the global financial crisis in February 2008, Carney promptly slashed the overnight interest rate by 0.5 percentage points to boost the stuttering Canadian economy. The result? The economy outperformed its G7 peers and Canada managed to restore its GDP levels to pre-crisis levels quicker than anyone else.

Here, Carney has inherited the record low Bank base rate of 0.5%: a level Britain's consumers have had plenty of time to get used to - it's been at rock-bottom since March 2009.

This has been somewhat of a gift to homeowners, as they have enjoyed cheaper repayments on their mortgages, but savers and people dependent on an income from their savings (such as pensioners) have endured years of misery. The average savings account pays just 1.8%, so a pensioner with £10,000 worth of savings will generate just £180 a year before tax.

If Carney keeps the base rate low, that misery will continue. Unfortunately for savers, Carney's very first BoE statements indicates that he will indeed stick to the ultra-low interest rate model operated by his predecessor.

No surprises

Carney has embraced a strategy known as 'forward guidance', where a central bank flags up what is expected to happen to interest rates way beyond its next policy vote. Carney's statement on 7 August means we already know a rate rise is unlikely in the short term. He said a rise will only be triggered should the unemployment rate hit 7% - it currently stands at 7.8% and is not forecast to drop to 7% until 2016 at the earliest.

"The BoE will not choose to raise rates until there is a positive wealth effect, such as from significantly higher stockmarkets," Coutts said.

Stuart Welch, chief executive of TD Direct Investing, said investors could benefit: "When you look at average returns on savings versus the FTSE 100's performance, it is easy to see where investors might be able to make gains."

During the reign of the BoE's previous governor, Sir Mervyn King, the FTSE rose by 52% from 3963 on 1 July 2003 to 6215 (at the close of play on 28 June). While markets clearly had their ups and downs during this time, Welch says this is more than one and half times the return an investor might have seen from an average savings account.

Sarah Lord, head of chartered financial planning at Killik & Co, says the outlook could continue to be grim for pensioners: "Since taking up his post, Carney has said that base rates are likely to remain low for some time, which is not a good thing for savers - in many cases it has had an impact on individuals' standard of living.

"Equally, the economic environment we have been in has also led to very low gilt yields which, in turn, has had an impact on annuity rates, which are at all-time lows. Therefore, individuals looking to take their pension benefits are receiving a lower income from their pension. The converse to this is that the low interest rate environment has aided the stockmarket as people look to get a return on their capital and, in particular, an income stream from dividends."

Expat misery

According to the deVere Group, Carney's arrival could "herald misery" for a million expat pensioners. The one million British retirees who live abroad and claim a UK state pension could be hit if Carney devalues the pound.

"We expect the Governor of the BoE to devalue the pound by up to 15%," says chief executive Nigel Green. "This would be another devastating blow for Britons overseas who live on a fixed sterling income. Many of these British retirees have, through no fault of their own, lost more than 20% of their income since the financial crisis hit - a problem that's been compounded by soaring living costs in most major expatriate destinations."

Anyone who lives abroad and whose primary income is a UK state pension has certainly been feeling the pinch - at the beginning of 2007, they typically received a rate of about 1.48 to the pound but this is closer to 1.16 now. Green says it is "likely to get worse before it gets better", especially as Carney has taken the above stance on monetary policy.

So the Canadian is potentially good news for investors and homeowners, but savers and pensioners might struggle.

But what do you think? We asked whether Carney will be good for your savings. The majority (70%) said he will not, with 49% saying he will look after those in debt instead and 21% claiming he wants to get people spending rather than saving. But one in five believes that if he gets the economy going, interest rates will rise and savers will benefit.

Whatever the outcome, a Canadian in the hot seat is certain to shake up the Bank of England.

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