Savers will be forced to become investors as inflation starts to soar
Rising inflation and low interest rates will soon force savers to become investors in order to maintain the value of their money, Assetz Capital’s chief executive Stuart Law (pictured) has warned.
While cash savers may be used to historically low savings rates, Law says that rising inflation will make bank savings even less attractive to consumers, as the impact of inflation erodes the value of their money. The Financial Conduct Authority has just launched a campaign to encourage people to consider sensible investments much more than they do at present, but this change will not happen overnight.
“The savers and retired people of the world have suffered because of it but everyone else is hooked on the low interest rates,” says Law.
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“For interest rates to rise dramatically it would break the world – it would literally break the world as it is so reliant on low rates now after decades of benign conditions.”
The Bank of England has hinted at an upcoming increase to the base rate, but Law does not expect this increase to be too extreme. For a start, the economy could not afford a drastic rate hike.
According to one estimate, a rate rise of just one per cent would cost £25bn per annum in additional interest payments on the national debt. “And who’s going to pay for that?” Law asks. “The chancellor has made it quite clear that it will be us, the taxpayers.”
If the base rate goes up to five per cent, as used to be typical before the Global Financial Crisis, everyone from business borrowers to mortgage holders would suffer. But Law doesn’t think that the base rate rise will go anywhere near that far.
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“Most are now thinking that it will go up to one per cent in the next year and at most two per cent at some time in the future perhaps,” he predicts.
“Unless we get forced into it by some major black swan event people shouldn’t be worried about a massive increase in base rates at this stage, nor expect their savings rates to recover because banks are known to only pass on a small fraction of base rate increases.”
Meanwhile, inflation is expected to soar to four per cent over the next few months, and Law believes that the cost of living will continue to rise at a similar pace in the years ahead, to the detriment of cash savers.
“I don’t see inflation moving out of the three to five per cent zone for a long time – possibly a few years,” he says. “Let’s be optimistic – let’s say we see three per cent inflation for the next five years. That means your money is worth around 97 per cent of what it was the previous year.
“Within five years your money will be worth just around 85 per cent of what it’s worth today. You’re going to lose 15 per cent of your capital over the next five years at three per cent inflation. And that won’t be materially countered by bank savings rate increases.
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“People are going to be forced into investing their money to avoid this and to try to beat inflation.”
For years, Assetz Capital and other P2P lenders have made the case that in terms of risk, P2P sits somewhere between cash savings and stocks and shares investments. Law points out that last year, the stock market collapsed by tens of percentage points and people accepted it as a norm. P2P lending from most established platforms has not seen that volatility, and platforms such as Assetz have been delivering inflation-beating rates for years, including 2020.
“The income we produce is way above that in savings accounts,” says Law. “There’s more risk but probably not as much risk as shares on the stock market.
“Investors need to start asking whether they want to have the volatility of the stock market, a lack of income from a bank account with huge security, or do they want to take a moderate level of risk and invest a sensible sum with a proven platform? P2P has a place in a balanced portfolio.”
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