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Peer2Peer Finance News | July 18, 2019

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Low interest rates spell more bad news for savers

Low interest rates spell more bad news for savers
Kathryn Gaw

SAVERS were dealt another pre-Christmas blow as the Bank of England chose to hold interest rates at a historic low, just days after inflation rose from 0.9 per cent to 1.2 per cent.

The Bank of England’s monetary policy committee (MPC) voted unanimously to maintain the base rate at 0.25 per cent on Thursday.

This is good news for borrowers such as mortgage owners, who may be able to find more competitive rates on their loans. But for savers, it signifies more pain in the New Year.

Earlier this month, data from Moneyfacts revealed that the average cash ISA rate was just 0.73 per cent, marking the first time the ISA’s average had dropped below one per cent. Earlier this week, the rate of inflation jumped to 1.2 per cent, form 0.9 per cent the previous month, meaning that the average cash ISA savings account is actually losing value in real terms. Next year, inflation is set to rise to 2.7 per cent and some economists have even predicted a four per cent leap, depending on the economic reaction to the Brexit talks.

With this in mind, economists have begun urging savers to rethink their financial plans in order to avoid losing money through inaction.

“With inflation predicted to reach nearly four per cent next year, there can be no doubt that households will face price rises,” said Alistair Wilson, head of retail platform strategy at Zurich UK. “This is why it is so important to put in place a savings strategy to protect income against any future increases. In the current low interest rate environment, savers need to be proactive in finding the right investment.”

Since the base rate was lowered to 0.25 per cent (from 0.5 per cent) in August, the UK’s peer-to-peer finance sector has seen a surge of interest from new investors seeking to make returns on their cash. The continuation of historically low rates is set to encourage more and more retail investors to look at the alternative finance sector in the year ahead.

“The lack of action from the Bank of England has piled more pain onto savers,” said Dominic Baliszewski, director of consumer strategy for Momentum UK. “Low interest rates combined with rising inflation will make saving money even less attractive, particularly during this festive time of year when many will choose to spend rather than save for a rainy day.

“Brits will now need to be savvier than ever if they want to make their money go further – anyone looking for a good earning rate on their money might want to look outside of traditional savings products for a solid return.”

Baliszewski added that “low interest rates are reaching the end of the road,” as rising inflation puts pressure on the Bank of England to raise rates sooner, rather than later. However, economist Dr Howard Archer of IHS Global Insights, predicted that the low base rate would continue throughout 2017.

“The December MPC minutes do little to change the view that interest rates are likely to stay at 0.25 per cent through 2017,” said Archer. “Indeed, it currently looks more likely than not to us that the Bank of England will be keeping monetary policy unchanged for a prolonged period, maybe out to 2020.”