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Interest rates maintained at record low 0.5%

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Written by: Paloma Kubiak
14/07/2016
It was good news for savers as interest rates were held at 0.5% for yet another month today, despite markets pricing in a 78% chance of a cut.

In the first meeting of the Bank of England’s Monetary Policy Committee (MPC) following the UK’s momentous Brexit decision, members voted by a majority of 8-1 to keep the Base Rate at 0.5%.

Only Gertjan Vlieghe preferred to reduce the Bank Rate by 25 basis points at the meeting.

The rate has remained unchanged at 0.5% since 5 March 2009.

Just last week, the swaps markets priced in a 78% chance that interest rates would be cut as early as today.

With the economic data deteriorating and nervousness around Brexit, it had been expected that the MPC would recommend immediate action be taken in the form of a rate cut in order to stimulate the economy and help it reach the 2% inflation target.

However, Minutes of the meeting held yesterday, stated: “Financial markets have reacted sharply to the United Kingdom’s vote to leave the European Union.  Since the Committee’s previous meeting, the sterling effective exchange rate has fallen by 6%, and short-term and longer-term interest rates have declined.

“The MPC is committed to taking whatever action is needed to support growth and to return inflation to the target over an appropriate horizon.  To that end, most members of the Committee expect monetary policy to be loosened in August.”

This is good news for mortgage borrowers on a variable rate deal as the Base Rate influences wider interest rates, so it’s unlikely they will see an increase in their mortgage pay rate in the near future.

For savers, no cut today is good news but rates remain at record lows.

Anna Bowes, director at independent savings adviser SavingsChampion.co.uk said: “The decision to leave base rate unchanged for at least another month will see savers breathe a sigh of relief – but they can’t afford to be complacent.

“We would argue that providers no longer need a change to the base rate to cut savings rates. Since 2012 we’ve seen nearly 4,700 cuts to existing savings accounts, although the base rate has remained at 0.5% since 2009.

“Many savings accounts couldn’t have even suffered a full quarter point cut. With almost a third of easy access accounts currently paying 0.25% or less, savers need to act now to better their returns. There are still providers that want savers’ cash and are willing to pay a competitive return for it.”

Maike Currie, investment director for personal investing at Fidelity International, said investors looking for a decent return on their investments may need to move money further up the risk spectrum, investing in equities or the slightly more risky bonds issued by companies rather than governments.

She said: “It also means the rules of retirement are changing. The sooner you can start to save into a pension the better – lower for longer returns mean you will need the benefit of time and compounding to build up a decently sized pot. Those nearing retirement will also need to rethink their pension planning. Traditionally, as you moved closer to pension age you would de-risk your retirement portfolio by moving assets from equities into less risky bonds to preserve wealth. However, with the income from bonds hovering near zero or below, there may be merit in sticking with higher returning equities for longer.”

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