How long will savers continue to suffer low interest rates?

Posted: 08/08/2013

How long will savers continue to suffer low interest rates?
Since UK base rates were cut to the historically low rate of 0.5% in March 2009, Government policy has ignored the plight of the saver in favour of policy designed to kick start the economy.

Quantitative easing and the Funding for Lending Scheme introduced a year ago, have depressed savings rates as banks have had access to £80 billion of cheap finance and the incentive to pay good rates to savers has disappeared. Savers have now received further bad news.

The new Governor of the Bank of England Mark Carney, at the Monetary Policy Committees first news conference since he took over at the Bank, has linked any future base rate increases to the level of unemployment. At the press conference it was announced that the MPC now “intends not to raise Bank Rate from its current level of 0.50% at least until the Labour Force Survey headline measure of the unemployment has fallen to a threshold of 7%”.

The BoE has therefore tied itself to not raising rates until unemployment falls to 7% from its current level of 7.8% and on their current projections the MPC does not expect this level to be reached until the end of 2016. They went on to say that maintaining current rates would be conditional on low inflation and a stable financial system.

This shift to a target represents another innovation at the BOE by Carney after he began guiding investors on policy last month, just a week after taking over from Mervyn King. With the economy showing signs of strengthening, the central bank said the new tactic should reduce the risk of a “premature” increase in short-term rates and help to secure the recovery. This forward guidance signals Carney's intention to keep markets informed and orderly, however, the announcement had so many caveats attached to it the signals were far from clear.

So the BoE has signalled a target date of Q3 2016 for a base rate rise, however, the question of whether the BoE can control inflation whilst waiting for unemployment to fall will dictate whether investors will have to wait until then for returns on savings to increase. It maybe that inflation starts to run out of control before Q3 2016 and base rates have to rise earlier but this recent news does not help savers in the short term. Base rates are set to stay low for an extended period.

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