Interest rates: A lost decade for savers and another blow to your pension

Governor of the Bank of England Mark Carney
Governor of the Bank of England Mark Carney
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Savers face a “lost decade” of returns on their investments after the Bank of England reduced interest rates to a historic low and announced a package of economic measures it predicted will allow Britain to avoid recession.

The bank’s Monetary Policy Committee voted unanimously to cut interest rates to 0.25 per cent, the first time it has altered it since 2009, but also published projections shwoing there would be little economic growth over the rest of 2016 and a sharp slowdown for the subsequent two years.

The Bank of England has pushed the button on the first cut in interest rates for more than seven years

The Bank of England has pushed the button on the first cut in interest rates for more than seven years

Chancellor Philip Hammond welcomed the decision but many business leaders both regionally and nationally questioned whether the move would result in anything other than a short-term fillip for the economy.

Former pensions minister Ros Altmann described the move as “another blow for UK pensions” while Kaith Khalaf, a senior analyst at Hargreaves Lansdown, said: “The nightmare for savers continues, and they now face a lost decade of returns on their cash.”

The rate cut was announced alongside a £170bn package of quantitative easing, corporate debt purchases and incentives to lend as the Bank of England’s own quarterly inflation report predicted the economy to almost flat-line at 0.1 per cent growth in the third quarter, a steep decline from the 0.6 per cent growth seen between April and June.

It said the Brexit vote has seen its forecasts slashed by around 2.5 per cent over the next three years, the steepest downgrade between two inflation reports since the Monetary Policy Committee was formed nearly 20 years ago.

The Bank of England has pushed the button on the first cut in interest rates for more than seven years

The Bank of England has pushed the button on the first cut in interest rates for more than seven years

Governor Mark Carney said the changes needed in the economy following the Brexit vote “may prove difficult and many will take time” but insisted “the UK can handle it”.

He said: “We have, in the actions we have taken today, improved the economic outcomes for this country.

“There will be less unemployment, more activity and a greater prospect of a successful adjustment to the new reality that the UK faces.”

Andrew McPhillips, Yorkshire Building Society’s chief economist, said: “A further reduction in Bank Rate is still likely but additional quantitative easing could be even higher up the MPC’s list of preferred options.”

James Andrews, head of investment management at Leeds-based stockbrokers Redmayne-Bentley, said: “The news continues to put pressure on savers, but should provide a boon to borrowers, and the hope from policy makers is that this stimulates spending in the economy and provides a buffer to the negative effects of the vote to leave the EU.

“We wait to see if this does indeed have the desired effect within the wider economy, but, in the meantime, the short-term market reaction is likely to be positive as the era of loose monetary policy continues. It remains to be seen if this provides anything other than a short term fillip for markets.”

What it means for savers

• Nearly three-quarters of current accounts on the market now pay a zero rate of in-credit interest. Moneyfacts.co.uk recently found that around 72% of current account deals do not offer an interest rate on credit balances, although some of these could offer other “perks” such as cashback.

• The average “no notice” Isa interest rate on offer is less than 1%. A typical no-notice Isa on the market in August was paying 0.95%, according to Moneyfacts. A year ago, the average rate was 1.11%.

• For every savings rate that has been increased in 2016, around nine have been cut, Moneyfacts’ data shows.

... and for borrowers:

• More than two million recent home buyers are likely never to have experienced a hike to their mortgage rates, having got on the property ladder while rates were static or falling.

• A spate of mortgage price wars has pushed rates to record lows. Notable deals launched recently include a two-year fixed rate from HSBC at 0.99%.

• As well as rates, mortgage lenders have also been getting more competitive with the fees that come with their deals - with growing numbers of fee-free offers. Borrowers can now choose from more than 1,200 mortgage deals with no arrangement fee, according to Moneyfacts, up from just over 500 two years ago.