The Bank of England has embarked on the first rate rise for a decade, but there remains a long way to go.
The pain goes on for savers. Despite the Bank of England increasing interest rates from 0.25% to 0.5% in November, interest rates on savings accounts remain at dismally low levels, with no end in sight. With inflation reaching a six-year high in the same month, growing your savings in real terms remains a considerable challenge.
Certainly, the rate rise failed to deliver the upturn in savings rates many hoped. December 2017 research by Moneyfacts found the number of savings accounts paying a higher rate than 0.5% fell by 150 in the month that followed the base rate rise – the biggest drop in almost a decade.
The average easy access account rate crept up by just 0.06% to stand at 0.45% – showing banks and building societies were failing to pass on the full benefit of the base rate rise.
According to figures from the Building Societies Association, in November 2017, the average bank and building society savings instant account was paying just 0.12%, including bonus. The average one-year fixed rate bond offered just 0.72%. Back in July 2016 – just after the EU Referendum and before the decision to reduce base rate to 0.25% – these accounts were paying an average 0.34% and 0.93% respectively. In other words, average rates remain worse now than before the last rate cut.
The Bank of England’s first rate rise since the global financial crisis was a clear signal of its growing confidence in the UK economy, following the initial uncertainty over Brexit. But savers hoping it would be followed up by further rate rises – such as the US has experienced – have been disappointed. That seems to be it, for the near future at least.
Speaking in January 2018, Bank of England policymaker Silvana Tenreyro expects two further increases in base rate would be needed over the following three years, but that the Bank had “ample time” before considering the next rise. This view mirrors the governor Mark Carney, and other senior officials at the Bank. Economists themselves are divided over the prospects for 2018, with a Financial Times survey finding one-fifth of economists believe there will be no increase, whilst two-fifths expect it to rise by at least 0.5%.
But whatever happens in the near future, one simple truth will remain unaltered for savers. It is going to be a long time, if, indeed, ever, before interest rates return to the 5%+ levels seen in 2007.
Re-evaluating your long-term plans
Savings accounts will always play a part in a sensible investor’s portfolio. The security, and ease of access, makes them ideally suited for your short-term financial needs.
Yet when it comes to your long-term financial priorities, the personal finances world has simply changed. Savings accounts are no longer able to generate meaningful, lifealtering returns. If you have money ear-marked for your future and are prepared to commit it for the long-term, other options need to be considered.
Investing your money offers the potential to achieve higher returns. You will need to accept risk to your capital, but speaking to a financial adviser can help to develop an investment strategy that’s right for your needs.
The value of your investment can go down as well as up and you may not get back the full amount invested. Investments do not include the same security of capital which is afforded with a deposit account.
(Sources: http://www.bbc.co.uk/news/business-42320052https://moneyfacts.co.uk/news/savings/base-rate-beating-savings-deals-fallsharply/ https://www.bsa.org.uk/statistics/savings https://www.reuters.com/article/us-britain-boe-tenreyro/ample-time-before-nextbank-of-england-rate-move-needed-tenreyro-idUSKBN1F42EZ?il=0)