Lower Interest Rates For Longer. If You Are Offered Something That Seems Too Good To Be True, It Probably Is!


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With the UK economy performing relatively well, there has been much speculation over when interest rates will finally rise. It now looks like savers will have to wait until mid to late 2015 for an increase.

With the UK economy performing relatively well, there has been much speculation over when interest rates will finally rise. Even the Bank of England Governor, Mark Carney, said in June that the economic recovery may mean the time is nearing. However, it now looks like savers will have to wait until mid to late 2015 for an increase.

The Bank of England (BoE) base interest rate has been at 0.5% since March 2009, and looks set to enter a sixth year at this record low. Six years of negligible interest rates has caused considerable damage to savers. In March last year the UK action group Save our Savers calculated that British savers had lost around £220 billion over four years, largely due to the level of inflation being higher than interest rates. More has been lost since.

Earlier this year there was talk of a rate rise this November, but minutes of the Bank’s Monetary Policy Committee’s (MPC) October meeting and dovish comments made by members now suggest savers will need to wait longer.

In recent times, the UK economy has been one of the best performing in the developed world, but there are concerns about a slowdown. The majority of MPC members were against raising rates at this point, citing weak inflation in the UK and the worsening economic situation in the Eurozone, Britain’s most important export market. The manufacturing sector has been hurt by the softening in global demand, a strengthening Sterling and geopolitical events.

The minutes explained: “A premature tightening in monetary policy might leave the economy vulnerable to shocks, with the scope for any stimulus that subsequently became necessary being limited by the effective lower bound on Bank rate.

In a speech on 17th October, the BoE’s Chief Economist, Andrew Haldane, said that “interest rates could remain lower for longer”.

He observed that real interest rates – the amount savers are really earning after inflation – have been around zero for almost four years. They are at their lowest since the 1970s, but then inflation was in double digits.

Mr Haldane’s comments followed uncertainty in European stockmarkets, and his dovish speech seems to have been designed to assure the markets that the BoE is not likely to raise rates in the immediate future.

Economists have shifted their predictions of a first rate rise from early 2015 to mid or even late next year.

Capital Economics predicts that the first rate rise will now come in May next year, and will only reach 1% by the end of 2015.

The Centre for Economics and Business Research warned savers that rates may not rise for another 12 months. Chief Economist Scott Corfe said:

With the world economy wobbling and significant weakness in the UK's largest export market, the Eurozone, it is increasingly likely the Bank of England will hold off on raising rates. What looked like a February 2015 rate rise a few months ago now looks like a November 2015 rise.

The bank itself has been keen to focus attention not on when rates will rise, but that when they do, further rises will be “gradual and limited”.

How much of your savings do you keep in a bank account? If you have the long-term goal of maintaining your standard of living through retirement, then you need to maintain your buying power over the period – and it may be longer than you expect. You need to aim to earn real returns after inflation and taxation. That is very hard to do with interest and tax rates today.

Many people are therefore taking a risk by leaving their money in the bank, even though they think of it as a safe place.

On the other hand, do not be tempted by investments offering double digit returns, even if they imply that they are low risk or that the returns are guaranteed. Remember, if it seems too good to be true it probably is. Do not risk your wealth.

What you need is a considered and strategic investment plan, designed around your personal circumstances, aims, time horizon and risk tolerance. Using professional guidance, obtain a clear, objective assessment of your attitude to risk to establish the investment strategy that suits you best.

Having a professional manage your investments also means that you do not need to worry about what changes to interest rate expectation mean, or how the markets react, or economic developments. If you use an advisory service, you will have a professional looking out for you, to advise you when you do need to make changes. With a discretionary service, you leave it to the experts to make portfolio switches as needed in fast response to events. Seek advice on what would work best for you.

Blevins Franks provide both advisory and discretionary investment management services using highly rated organisations such as Banque Privée Edmond de Rothschild Europe, as well as sophisticated psychometric analysis of your appetite for risk. We then design strategic asset allocation matched to your risk profile. We recommend tax efficient arrangements for your investments, to limit your tax liabilities as much as possible in Spain, France, Portugal, Cyprus and Malta.

28 October 2014

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.