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Interest rates held at record 0.5% low

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Written by: Paloma Kubiak
14/04/2016
Interest rates have been held at 0.5% for the 85th consecutive month, the Bank of England announced today.

The Bank of England’s Monetary Policy Committee (MPC) voted unanimously in favour of maintaining the 0.5% base rate, which means interest rates are unchanged for over seven years.

It cited weak global supply growth, the recent unexpected increase of CPI inflation to 0.5% in March and the depreciation of sterling as reasons behind the decision.

The MPC said returning inflation to the target rate of 2% would be done gradually in a “sustainable fashion” and it expects to reach this in “around two years” where the figure would be held “in the absence of further shocks”.

For industry commentators, the decision to hold rates came as no surprise amid the International Monetary Fund downgrading its UK economic growth forecast and the uncertainty over the Brexit referendum.

Hoarding money vs investing money

Maike Currie, investment director for personal investing at Fidelity International, said: “There was speculation over whether we could see some MPC members vote in favour of taking rates into negative territory. Denmark, Sweden, Switzerland, Hungary, the eurozone and, most recently, Japan have all joined the so-called negative interest rate club, introducing sub-zero rates for commercial bank deposits to encourage banks to lend money more cheaply. This in turn emboldens savers to go out and spend, bolstering economic growth and raising inflation.

“However the concern is that the opposite is playing out with savers, unable to get the returns they need to prepare for retirement, saving money rather than spending it. “

Currie adds that in this challenging environment investors are likely to continue to turn to stocks and shares to help generate a real return on the savings.

“If you’re unsure about the benefits of investing in the stock market over hoarding cash, our calculations show that if you had invested £15,000 into the FTSE 250 index 10 years ago you would now be left with £33,925. If, however, you had invested £15,000 into the average UK savings account over the same period, you would be left with a paltry £16,036. That’s a difference of £17,889 – far too big for anyone to ignore,” she said.

Jeremy Duncombe, director legal & general mortgage club, said while the decision is good news for many homeowners, it is vital that potential borrowers and those looking to remortgage do not get complacent about rock-bottom rates.

“The temptation to delay looking at new mortgage deals should be ignored, as mortgage rates are not directly linked to base rates. Anyone who is thinking about re-mortgaging should therefore speak to a broker now to find out about the best product for their individual circumstances, before these deals disappear.”

Three reasons why interest rates won’t rise too soon or too quick

Russ Mould, investment director at AJ Bell, gives these three reasons as to why interest rates do not seem likely to increase very soon or very quickly:

1) A move above the Bank’s 2% inflation target would be seen as a lesser evil than a slide back towards deflation.

2) Inflation would erode the value of the UK’s enormous aggregate public debt in “real” terms.

3) Any sudden rate hike could prompt a rally in the pound which could stifle exports and thus economic growth, as well as inflation as it would lessen the cost of imports.

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