We are already nearing the start of the second month of 2014. I can’t quite believe February is almost upon us.
At this point of 2009, the Bank of England Base Rate was an already low 1.5%, followed by 1% on 5 February and 0.5% on 5 March. Just 12 months earlier in 2008, it was 5.25%.
As we enter what is certain to be the fifth year of five years plus of historically low interest rates, one can’t help reflecting on both the positive impact on helping the economy stabilise whilst being cognisant of the damaging effect on savers – especially those who rely on the interest on their hard earned savings to supplement their retirement incomes.
The impact has not just been on cash savings. In 1990 a 65 year old male with a £100,000 pension pot would have been able to achieve an annual pension of £16,000. Today they would be lucky to achieve £6,000.
When rates first hit their historical low, the deal for savers was better. There was still the aftermath of the banking crisis to think about, which meant limited liquidity in the banking system, which kept competition for retail savings high. In late 2009 for example it was quite normal to get 3.5% plus on instant access cash deposits, despite the low base rate. Now though things are very different.
The wholesale funding markets on which the big banks relied heavily pre-crunch are more active than they have been for five years. The Bank of England’s own Funding for Lending scheme (FLS) has given lenders access to cheap funding and even those who have not taken cash from the scheme have seen the competition for retail deposits diminish to the point where they have had to lower rates to prevent attracting more than their required share of the cash.
So today the best in the market for instant access is 1.6%. I am of course proud to say that comes from Kent Reliance but I can’t feel smug about that when I know just how much some savers are struggling.
On the economy generally we keep hearing warm and positive noises:
- The housing market is moving and prices are heading up
- Unemployment is improving which is great news
- Inflation is falling, again great news
- Economic output (GDP) is up
However the expectation of most economists is still that the Monetary Policy Committee will be raising rates deep into 2015.
Of course we have had so long with low borrowing costs now, that rising rates present real threats to the sustainability of our improving economic situation. For example households with mortgages and other debts have limited capacity to absorb payment increases. Businesses are not quite feeling flush enough yet to tolerate borrowing cost increases. So the line the UK is treading is still a very fine one.
I also know that no one really has the answers. Many things have been suggested to help savers, such as temporary increases in tax-free savings limits, or a complete termination of tax on interest until rates rise, but they all cost money at a time when the government cupboard is not bare, but is certainly not well stocked.
Inflation reducing will help, but I fear there is simply a while yet for savers to wait to see their returns come back to anything like the levels that have been there in the past.
In the meantime Kent Reliance will continue to try and offer our customers competitive products and hope that the balance improves for savers and borrowers soon.