Rate rise? Don’t let your hopes rise
For what feels like the first time in my life – I was only 18 when the financial system collapsed in 2008, and had nary a clue why there were half-mile queues outside Northern Rock – we look to be on the brink of an interest rate rise. The ‘Unreliable Boyfriend’ has finally returned home.
But while the Bank of England (BoE) governor’s apparent signalling of the first rate increase in more than a decade sent the pound soaring (in strictly relative terms), for savers the incremental step-up will mean very little. Other than your pounds becoming pound-and-half-pennies every 12 months rather than pound-and-quarter-pennies – a pitiful return.
I’m almost grateful that I never cognitively experienced the heady days of 5% base rates.
Still, in a debt-laden economy where cheap finance has been standardised and exploited to the max – by both lenders and their customers – the BoE shouldn’t be castigated for its understandable reticence to implement something that may well blow a Brexit-shaped hole through the gut of consumer confidence.
Then there is the apparently growing wave of momentum behind the current incarnation of Labour, as led by Jeremy Corbyn and his left-hand man John McDonnell. While it may not be immediately apparent how this relates to your savings, consider the medium-term economic impact.
On one hand we have Theresa May and what I think are best described as her Conservative rabble, who, despite appearing to have no co-ordination on policy whatsoever, would make a decent bet for those predicting continued austerity. However, this – according to the latest YouGov poll – is not the public’s preferred option, despite what I see as the obvious benefits to the country’s broader economic health.
Waiting in the wings are Corbyn’s promises of money for the masses: fun and games for consumers in the short run, but increased government spending will soon begin to weigh on the UK deficit. Despite Chancellor of the Exchequer Philip Hammond’s best efforts, this still stood at £47bn in March.
If you think the pound’s recent fall and the subsequent effect on inflation since Brexit has been bad, imagine what would happen to both the economy and the value of your money if the deficit began to reverse the £28.2bn improvement seen in the previous 12 months.
So, what does this mean for your wealth?
Although it may look like the first junction on the road back to normality, if and when it arrives, the rate hike will be a long upward slog, possibly with a chasm or two along the way.
A decade of almost zero interest on deposits has seen trillions poured into equities and bonds, and, despite the unprecedented highs being recorded in both markets, these flows are unlikely to abate. Why? Because with inflation currently eroding your bank account five times faster than it is growing, even a doubling of the interest rate is little more than a tease.
I would argue that, despite the fanfare around the so-called ‘first step’, even after it is implemented you, the saver, could still be in a far worse position than you were a year ago. For example as a basic calculation, in real time money value we’ve compared the interest rates for 2016 and 2017, as a percentage of the rate of inflation at that time.
A saver with an interest rate lower than inflation could be 1.54% worse off. Of course each individual will be different as people will be receiving different interest rates, but on a broader level you can see the basic effect on deposits.
It is a strange predicament to be in, this ‘New Normal’. In less than 12 months, the post-crisis years of our policymakers up on Threadneedle Street fretting over low or no inflation have mutated into an era of double-financials: working for your money, and then making your money work for you, just in order to not see your savings drain themselves away.
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.
