THE BANK of England’s U-turn on further rate cuts today provided little respite for savers, as the central bank warned of a sharp rise in inflation.
Hints of another rate cut have been dropped, due to the increasing cost of living. The central bank warned that inflation will rise well above its two per cent target to 2.8 per cent in 2018, before falling slightly to 2.5 per cent in 2019. This is largely due to the fall in the pound following the Brexit vote, raising the cost of imports.
Policy makers indicated that the next rate move could now be in either direction. The base rate is currently set at a historic low of 0.25 per cent, which is good news for borrowers but bad news for anyone hoping to accrue interest on their savings in the bank.
“There are limits to the extent to which above-target inflation can be tolerated,” said the bank’s rate-setters, although they did not indicate at what point they would step in with a rate hike.
The central bank admitted that the economy had held up better than expected following the Brexit vote, which is likely to reinforce criticism that Bank of England governor Mark Carney (pictured) acted too hastily in cutting rates following the June referendum.
“Reports of resilient UK growth may have quashed the Bank of England’s plans for a further base rate cut, however rising levels of inflation will place renewed pressure on Mark Carney to reverse his ultra-low interest rate strategy, which has been the paradigm of monetary policy for nearly 10 years,” said Kevin Caley, founder and chairman of peer-to-peer lender ThinCats.
“Savers in particular, have borne the brunt of lower interest rates and will now see their living standards further stretched thanks to negligible wage growth and the inflationary impact of a dramatic weakening of the pound since Brexit. For the millions of people who rely on interest from savings and pension investments, until the base rate exceeds inflation, they will continue to lose out.”
The prevalence of low interest rates, combined with soaring inflation, is likely to encourage savers to look around for better returns. Peer-to-Peer Finance News reported last month that long-term fixed cash ISAs and bonds are offering their lowest-ever returns as a result of the latest central bank rate cut.
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“The bad news for savers just gets worse, as declining interest returns cannot match the rate at which prices are set to rise,” said Danny Cox, chartered financial planner at Hargreaves Lansdown.
“Savers face the continuing vicious circle of eating into their capital or taking a leap up the rungs of the risk ladder in search for inflation beating returns.”
The fund supermarket suggests that savers consider lending via P2P platforms to get higher returns.
“P2P providers match lenders and borrowers to provide investors with attractive interest rate returns as an alternative to traditional gilt, corporate bond and fixed interest investments,” it said. “P2P is an investment, not a cash alternative, so is only for those who are happy to accept risk to their capital and interest. From April this year the new Innovative Finance ISA allows investors access to P2P products within a new, third way ISA.
“A good “rule of thumb” is to work on the basis that the higher the interest rate you are offered, the more risk you are taking on. There are many different providers so make sure you do your homework and understand what you are signing up for and the risks.”
Hargreaves Lansdown is moving into the P2P space and is set to launch its own platform early next year.