Base rate will have been held at 0.5% for seven whole years, if the Bank of England decides to keep interest rates on hold for February at its next policy meeting tomorrow.
Since the financial crisis, cash savers have seen returns on their deposits all but vanish. We estimate they have lost £160 billion in lower interest payments, compared to the rates they were receiving before the financial crisis.
Things don’t look like getting better for cash savers anytime soon. Interest rate markets are now pricing in a higher probability of a rate cut this year, than a rate rise.
Laith Khalaf, Senior Analyst, Hargreaves Lansdown:
‘Loose monetary policy has obliterated the returns enjoyed by cash savers, who now face an eighth year of rock bottom interest rates, with little sign of any respite. Cash has been trashed, while shares and property prices have been given a leg up by the low cost of borrowing.
Looking forward, the plunging oil price has taken over from the global financial crisis in discouraging the Bank of England from raising interest rates. The deflationary effect of cheaper fuel and energy is likely to keep policy makers hiding in their dovecotes for some time to come.
Indeed markets are now pricing in a higher chance of an interest rate cut than a rise this year. At the moment UK monetary policy is being held in check by two opposing forces; low inflation on the one hand, and a growing economy on the other. Should the economy falter, the scales will start to tip towards loosening monetary policy once again, either through an interest rate cut, or more quantitative easing.
The current low inflation environment does at least mean cash returns don’t look quite as rotten as they might, though that will be pretty cold comfort to savers.’
Not so great expectations
The market is now not expecting a rate rise in the UK until 2017. Indeed market rates actually suggest there is a 30% chance of a rate cut at some point this year, compared to just a 5% chance of a rate rise.
We should also bear in mind when interpreting this figure that the market has consistently jumped the gun when it comes to predicting interest rate rises. At the end of 2009, the market expectation was that interest rates would be back at 4% in 2012.
As things stand, the opposing forces of low inflation and reasonable economic growth are likely to lead the Bank of England to maintain the current policy course for the foreseeable future.
What options do savers have?
- Grin and bear it. Or at least bear it. Everyone needs a cash buffer to meet immediate spending needs, at least 3-6 months of expenditure, or when money is needed within the next 5 years, so there is no way of totally avoiding low deposit rates. It makes sense to shop around for the best deal for your savings however.
- Put your savings in an ISA. The tax protection afforded to you might seem pointless right now, but in 4 or 5 years’ time you might be getting a better rate, and will be glad you had the foresight to shelter your savings from the taxman. You can also now switch your savings between cash and stocks and shares ISAs, giving you greater flexibility to react to changing circumstances.
- Government and corporate bonds. You’d be a brave investor right now to turn to the government bond market for income. With gilts yielding 1.6%, you aren’t getting much compensation for the risk prices may fall from already high levels. Corporate bonds are currently yielding around 4%, which looks OK, but you have the added risk of company defaults to bear.
- Stock market funds. If you have cash savings which are for long term goals (5-10 years or more), consider investing this money in the stock market. This comes with the additional risk you will get back less than you invest, so you should be willing to take this on board. If you need income then a UK Equity Income fund might be a good port of call. These funds typically provide a yield of around 4%, with the potential for both income and capital growth.
- Peer to peer lending. In response to falling interest rates many savers have turned to alternative finance to provide better returns, and peer to peer lending platforms have been at the forefront of this trend. These platforms allow individuals to lend money directly to other individuals and to companies, typically picking up an attractive rate of interest in return. There are of course risks, in particular that the person or company you lend money to fails to pay it back. Different lending platforms have different ways of protecting investors from such events.