The Bank of England today announced an interest rate cut for the first time in more than seven years to a new low of 0.25%. This is a shot in the arm for long suffering savers, who have low interest rates for many years.
There are no savings accounts on offer which beat the inflation rate forecast
In response to the impact on savers, Bank of England Governor Mark Carney said at a press conference in London today: “With respect to savers, this is something that we think about a lot as a group of people who have worked hard, absolutely done the right thing, set money aside and the returns are very low and they’re likely to be low for some time. That's true in the UK, it's true in all advanced economies.”
But his earlier comments revealed how badly savers would be hit. Speaking in relation to the positive impact for borrowers Carney said: “Let me say this to the banks, the banks have no excuse with today's announcement not to pass on this cut in the bank rate. They should write to their customers and make that point.”
Inflation Far Higher than Saving Rates
The UK central bank also revealed that today that it expected inflation to rise to 2.5% by the end of 2017. Yet there are currently no standard saving accounts that pay more than 2.5%, according to comparison site Moneyfacts UK. The top deal at the moment is a fixed rate bond paying 2.3%, which savers would lock their money away for five years to earn.
A combination of low interest rates and weak sterling which will raise inflation, means many savers will be stuck earning a negative rate of return.
Britons Continue to Hold Cash Despite Falling Rates
The average Briton continues to hold more than two-thirds of their money in cash, in spite of low interest rates, according to a BlackRock’s Investor Pulse report.
“The bad news is that this level of income is going to be harder to achieve with the amount of cash that people have sitting in the bank. Now, more than ever, people need to put their hard-earned cash to work so that they can get on track to meet their retirement goals,” Jeremy Roberts, head of UK retail sales at BlackRock said.
Older savers in particular must now be thinking about moving up the “risk ladder” with their savings to achieve more income they need, Gareth Shaw, head of consumer affairs at Saga Investment Services said.
“Some 81% of over 65s with an ISA hold their savings in cash and its clear this will no longer suffice. They should now be considering building a diverse portfolio of shares and bonds, which can help pensioners, find the yields they need,” Shaw said.
He suggested investing small amounts to start off with and see what a difference it could make as according to Saga’s research, a small shift of 10% of money from cash products into financial assets could boost income by 76%.
For a less risky option, Moneyfacts suggested savers do not put all their eggs in one basket and instead opt for a mixture of fixed rate bonds, easy access accounts and a high paying current account. This will ensure savers benefit from the certainty of a fixed rate bond but are able to move some cash easily if the market picks up.
Saving Rates Cut Even Before the Bank Moved
Saving accounts were already poised to cut rates before end of the year even before the Bank of England announced an interest rate cut today, according to SavingChampion.co.uk.
In May, June and July alone this year, 485 accounts cut interest rates for savers. A further 117 accounts have already given advance warning they will be reducing rates between August and the end of December.
The largest cut among these saving accounts in the last three months was 1.49 percentage points, while the average ranged between 0.21 percentage points and 0.26 percentage points.
Susan Hannums, director at Savingschampion.co.uk said with almost 5,000 rate cuts to existing savings accounts in the last four years, a base rate cut now will just make an already bad situation worse than anything else. However, she expects things to accelerate by the end of the year following the UK interest rate cut.
