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The War on Savers

March 2020

by Alex Brandreth

Bank of England cuts Interest Rates back to record lows

The Bank of England (BoE) recently cut interest rates to 0.1% and restarted Quantitative Easing, in a measure to support the UK economy. This action was taken amidst the ongoing economic concerns, emerging from the Coronavirus pandemic. This was the second time in as many weeks that the BoE had cut interest rates. This is a trend globally, as interest rates have been moving lower. The Federal Reserve has cut US interest rates, to a range of 0% and 0.25% and restarted unlimited Quantitative Easing (QE). US interest rates have only been as low as this once, which was during the Financial Crisis in 2008. It’s not just the US and UK central banks that have taken action, interest rates in Europe and Japan are at 0%, or even in some instances, negative territory.

Central banks have kept interest rates low in recent years, to support their fragile economies in the aftermath from the Financial Crisis. With interest rates being kept low, it means Central Banks now have limited firepower to support the economy. Take the UK as an example, at the end of 2007 interest rates were at 5.5%. During the Financial Crisis, these rates were reduced by over 5%, to support the economy. Before the Coronavirus outbreak, rates in the UK stood at only 0.75%. In the absence of Central Bankability to support the economy, Governments needed to step in and that’s the reasons behind the large packages that are currently being announced. The US government announced this week that they will be launching a $2 trillion support package, for the world’s largest economy.

The War on Savers

I’ve entitled this piece the “War on Savers” because in this highly indebted world – its savers that are being punished. With interest rates now at 0.1% and UK Consumer Price Inflation (CPI) currently at 1.8%, the long term theme of inflation running higher than interest rates continues. The impact of this is that savings are gradually losing their buying power in real terms. If you look at the impacts of this over a longer time period, it becomes significant. Over 10 years, UK CPI has totalled 23%, whereas the average saver, 3 month London InterBank Offered Rate, or LIBOR, has earned 7% over the same time period. Putting these numbers into pounds and pence – If you had £10k 10 years ago, it would now be worth £12.3k in real terms, had it risen with inflation. Conversely, money left “in the bank” at LIBOR would be worth £10.7k. That’s a huge difference and the longer that interest rates are kept lower, the bigger the impact that inflation will have on savings.

So what can we do instead of hoarding cash?

Despite the current volatility and the ongoing Coronavirus concerns, for those taking a longer-term view, now may be considered good opportunity to start investing. It is always important to have enough cash to cover emergency expenditure and contingency needs. However, excess cash above this level could potentially work much harder, by being invested into bonds, equities (stocks and shares) and alternatives.

At Pareto we invest in a wide and diversified range of multi-asset portfolios. We are not just betting on the returns of the stock market. Our qualified advisors can help tailor portfolios, to match your individual needs and objectives. For example, if you’re retired and require a regular income distribution, we can factor that into the portfolio that you’re invested in, to ensure regular dividend/income distributions are paid out to you. Although investing should be considered a long-term exercise, with a term of 5 years as an absolute minimum, the investments we hold are for the most part highly liquid and if you need cash back at any time – we can usually arrange a withdrawal within days. You should however be aware that taking disinvesting in the early days could potentially lead to investment losses.

The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. Past performance is not a reliable indicator of future results.

 

The content in this publication is for your general information and use only and is not intended to address your particular requirements. Articles should not be relied upon in their entirety and shall not be deemed to be, or constitute, advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts. Levels and bases of, and reliefs from, taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investments can go down as well as up and you may get back less than you invested. Past performance is not a reliable indicator of future results.
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