There is more bad news for cash savers, as bank interest rates continue to fall. In the UK, only one account now provides enough return to beat inflation, while here in the Eurozone the main interest rate has been cut to a record low.The European Central Bank (ECB) last cut its benchmark fixed rate in July 2012…
There is more bad news for cash savers, as bank interest rates continue to fall. In the UK, only one account now provides enough return to beat inflation, while here in the Eurozone the main interest rate has been cut to a record low.
The European Central Bank (ECB) last cut its benchmark fixed rate in July 2012, when it was reduced by 25 basis points to 0.75%. At its May Governing Council’ meeting, policymakers voted to reduce it again, this time to 0.5%, in a bid to kick-start the Eurozone’s ailing economy. This may not be the last cut either.
The Bank also cut its marginal lending rate to banks from 1.5% to 1%. The overnight deposit rate was kept at 0%, but ECB President Mario Draghi said he was keeping an “open mind” about taking this rate into negative territory if necessary.
Draghi promised that “monetary policy stance will remain accommodative for as long as needed”.
These are bold moves for the normally cautious central bank. It is not a fan of low interest rates, and has lagged behind the Bank of England and US Federal Reserve Bank in cutting rates over the crisis years. It had even increased rates to 1.25% and 1.5% in 2011, before loosening monetary policy again.
The cut came amid worsening economic indicators for the Eurozone, with manufacturing contracting again in April and unemployment hitting a 12.1% high.
Draghi believes that the Eurozone could still recover from recession later in the year, saying that although weak economic sentiment has prevailed into the spring, economic activity should stabilise and recover gradually in the second half, aided by the interest rate cuts.
The ECB President raised the possibility of another rate cut if necessary, after some policymakers had pushed for a larger cut this time. This would take the Euro savings rate to an even lower level than the Sterling one.
He said that the bank will monitor all incoming evidence very closely; a statement which implies further policy action will come.
He also did not rule out imposing negative interest rate for its deposit rate, an idea that was mooted in the UK earlier this year. Draghi said that the ECB was “technically ready” to cut its deposit rate from 0%. He acknowledged this could have “several unintended consequences”, but said the Bank would address them and could cope with them if it did decide to act.
This would mean that it would start to charge banks for holding their money on deposit with the central bank, the idea being to encourage them to lend to businesses and consumers instead.
The ECB will also extend its offer of unlimited cheap loans to banks to at least July 2014, and look at ways of boosting lending to smaller companies. Although a vital part of the economy, they have been starved of credit in many countries.
Some analysts think the ECB could even consider a form of quantitative easing if necessary – something it has eschewed so far. This would involve creating money to purchase private sector assets.
Germany was critical of the decision to cut the key interest rate, since it actually needs rates to go up, not down. German savings and cooperative banks and insurers warn that looser monetary policy undermines the savings needed to protect ageing populations, while having limited benefit on the economy.
UK interest rates
The Bank of England interest rate is now in its fifth year of 0.5%, after being cut to this historic low in March 2009.
Economic data has looked better in the UK recently, but nonetheless there is no sign of a rate rise in the foreseeable future. Money markets are not pricing ina rise to 0.75% until late 2017, with 1% in early 2019 and 1.25% in the second half of 2020.
This would mean 10 years of rates at 0.5% or 1%, something which has already had a huge impact on savers.
At the end of March, after all the headlines about the proposed “haircut” on bank depositors in Cyprus, the UK action group Save our Savers pointed out that the UK government had imposed a more severe confiscation of savers’ funds than had been proposed in Cyprus.
It argued that British savers had lost around £220 billion over the four years since the base rate was cut to 0.5%, largely due to the level of inflation being higher than interest rates. It said: “This is a fifth of the size of the pool of UK cash savings, gone, never to return…. We have suffered a 20% haircut. The barber has just taken longer over it.”
More recently, This is Money reported that there is now just one account in the UK, a tax-free cash ISA, which pays a high enough return to beat inflation, and only if you are prepared to tie up your money for five years.
Bank savings rates in the UK have continued to fall, partly due to the government’s Funding for Lending scheme. Since this offers cheap money to banks, they do not need to offer higher rates to attract savers. In the meantime inflation remains above target, so almost all savers are earning a negative real rate of return once tax and inflation is added in.
In contrast, global shares have been enjoying a rally, with the FTSE 100 index hitting five year highs in early May.
There are risks to keeping too much of your savings in the bank. Besides the possibility of institutional failure, inflation will erode its value year after year, leaving you with considerably less spending power in future.
Speak to Blevins Franks, to discuss your personal objectives and circumstances and determine the best strategy for holding your savings.
10 May 2013