Expert reaction: the winners and losers of today’s interest rate announcement
Governor Mark Carney, just over a month into the role, has said the 7% mark represents the point at which the BoE will “reassess” its interest rate policy. The unemployment rate currently stands at 7.8%.
The BoE’s median forecast for unemployment in two years is 7.3%, according to today’s inflation report, but Carney said longer-term forecasts are uncertain.
The Office for Budget Responsibility (OBR) said in its March Economic and Fiscal Outlook that it expects unemployment to peak at 8.0% in 2014 before falling back to 6.9% in 2017.
This means there is a very real possibility that interest rates will remain at 0.5% for at least four years.
We look at who is set to win and lose from Carney’s interest rate announcement…
Those most negatively affected by Mark Carney’s proactive stance will be savers. The bank will likely tolerate above-target inflation over the next few years, meaning real interest rates will remain negative.
After 53 months of savings hell, it is little wonder savers are dropping like flies.
According to the Trade Union Congress (TUC), the rate of household savings has dropped by 43% in the past year, partly due to families struggling with rising prices and partly due to the lack of incentive to squirrel away money for a rainy day.
Campaign group Save Our Savers said that although the financial crisis was caused by debt in the first place, this policy continues to favour borrowing at the expense of saving.
The campaign group said that four and a half years of 0.5% base rate have failed to invigorate the economy yet have stolen over £220bn from the nation’s savers’ and removes consumer’s spending power.
Simon Rose of Save Our Savers said: “The Bank of England has failed to meet its inflation target for most of the past seven years. Now it clearly has decided to ignore even higher price rises, inflicting continuing misery on the majority of Britons, in the hope that the same policies that have failed the country since the crisis will somehow magically work in the future.”
Danny Cox, head of financial planning at Hargreaves Lansdown, said: “Interest rates on cash deposits aren’t going to rise anytime soon and certainly not significantly for three years it seems. That said, the Funding for Lending Scheme, which has depressed interest rates further, is due to end next year so there may be a little improvement then, unless it’s extended.”
Those investing into pensions should benefit from more stable and, hopefully, rising stock markets. Pensions are a long term investment and in most cases investors should keep saving regardless of short term news.
Forward guidance will bring clarity to annuity rates which have been subject to questions over rises for some months. We now know annuity rate rises are unlikely for 3 years.
Tom McPhail, head of pensions research at Hargreaves Lansdown, said: “For those with a small pension pot or who need certainty, it now makes sense to get on with buying an annuity; for those with larger pension pots or who can tolerate some investment risk, it makes sense to park the idea of buying an annuity for a few years and look to income drawdown instead.”
Meanwhile, John Fox, managing director of pension provider Liberty SIPP, said today’s news is “disastrous” for pensioners who already rely on savings for their retirement income.
He said: “As Mark Carney basks in the plaudits, many pensioners will be wringing rather than clapping their hands.
“The Governor’s commitment to what’s likely to be an extended period of low interest rates is disastrous news for pensioners who rely on savings for their retirement income.
“Such loose monetary policy may stimulate the wider economy, but the inflation side-effect it is likely to trigger will erode the spending power of anyone struggling to live on an annuity.”
The Bank of England itself has said in the past month that mortgage borrowers would struggle with monthly repayments if interest rates rose by as little as 2%, unless the rise was matched with a similar rise in UK incomes.
Therefore it goes without saying that those looking for a new mortgage, or already with one, will be relieved not to see their monthly repayments shoot up.
Danny Cox of Hargreaves Lansdown said: “Lower for longer interest rates and an easing of bank’s currently strict lending criteria will improve the mortgage market and we could see already ultra-low mortgage deals improve further.”
It is also worth noting that the UK’s recovery is largely underpinned by the housing market continuing to strengthen – which will require more people to want to get on the property ladder, more housing transactions and housing development.
Mark Harris, chief executive of mortgage broker SPF Private Clients, said: “The outlook for the housing market continues to improve as increased mortgage availability, better rates and more choice at higher loan-to-values combine to make buyers more confident about their ability to get funding.
“It is still too early to describe the housing market as being in rude health, however, as there is a worrying lack of stock, which is the main driver behind the latest rise in house prices. However, the number of transactions is also on the rise.”
The business community will no doubt welcome the continuation of the low base rate. Generally, the lower the interest rates, the better it is for business, be they big or small, to borrow and invest in their own growth.
John Cridland, director-general at Confederation of British Industry, said: “Greater interest rate certainty and clarity from the Bank should provide a shot in the arm for business and household confidence.
“This is a pro-growth statement with an important eye to inflation risks, and unemployment is an appropriate measure of economic progress.
“Businesses will be buoyed by the support it should give to the economic recovery and be reassured by the built-in conditions around inflation and financial stability.”
However, note that companies only have an incentive to grow and invest when the economy is booming, so unless GDP picks up, it is unlikely that they will invest heavily when demand from consumers happens to be low.
Demand from consumers will only pick up once general confidence returns within the economy, or if Britain as a whole gets a massive pay rise and therefore more disposable income.