MIKE COADY

Growth Expert | Business Excellence | People Transformation
Mike Coady was appointed Chief Executive Officer of swissglobal in 2018, a position to which he brings a strong financial background and experience across a variety of roles. Mike is a skilled business strategy and growth leader, coach and motivator. He is a people’s person known for his ability to inspire teams towards excellence. He mentors his people and departments to transform their passion into outstanding results and long-lasting relationships with their clients.
Top

Surviving and thriving in the low interest rate environment

Mike CoadyBusiness News Surviving and thriving in the low interest rate environment

Surviving and thriving in the low interest rate environment

When Bank of England governor Mark Carney announced in August this year that interest rates were to remain at historic lows, some championed his implementation of so-called ‘forward guidance.’

But there were others, of course, who would inevitably lose out from it – and once again these people include pensioners living off savings and pre-retirees.

With Carney’s pledge to maintain the 0.5% Bank of England base rate, it is arguably more important than ever to seek independent financial advice to make sure your financial plans take into account the rock-bottom interest rates, and work towards a fruitful wealth management portfolio.

Expectation for interest rates

The Bank of England’s base rate has remained at 0.5% since March 2009 following its rapid decline from the heights of October 2008 of 5%.  The Bank of England’s decision to reduce rates along with quantitative easing was designed to help boost the UK’s economy and kick start the recovery.   The boost comes from reducing the cost of borrowing for millions of people who have debt, by ensuring they have money to spend, which leads to growth in the economy.

The rate cuts were a kick in the teeth for savers who have felt a huge fall in income.  They have essentailly had to live on a much lower income from their savings.  Putting this another way, pensioners have suffered a 90% pay cut.   How much longer will they suffer?

The Bank of England Governor, Mark Carney, attempted to provide forward guidance on interest rates earlier this year by stating that the Bank of England would not consider raising rates until unemployment fell to below 7%.  This considered statement was intended to provide the market with clarity and certainty over the future direction of interest rates.

There has been concern recently following stronger than expected figures which gave rise to expectations that the 7% unemployment benchmark could be breached earlier than expected bringing it forward from late 2016 to early 2015.   This is because, although a rise in interest rates will be welcomed by savers, it will be a ‘drag’ on the economy as it will mean that people with debt will pay more, and thus stop them spending, leading to a potential contraction of the economy.

The Bank of England reacted last Wednesday to address fears over the potential rise in interest rates by stating that a fall below 7% unemployment was only a trigger to look at interest rates.

The minutes of the Monetary Policy Committee’s (MPC’s) November interest rate meeting stated “With the proviso that medium-term inflation expectations remained sufficiently well anchored, the projections for growth and inflation under constant Bank Rate underlined that there could be a case for not raising Bank Rate immediately when the 7% unemployment threshold was reached,”.  The minutes went on to say “Once unemployment had reached 7%, the Committee would reassess what it had learned about the nature of the recovery. In the meantime, the Committee would continue to judge the appropriate stance for policy each month in line with the guidance given in August.”

It is important to remember that even when interest rates do begin to rise it is likely to take a long time for rates to get back to the ‘normal’ range of 4-5%.  There are some analysts predicting this could take up to a decade, a gradual increase in rates will not be such a shock to the people with debt, who after all have to afford this, or stop spending!

This means that the interest rates which are currently available are likely to be here to stay for some time, much to the dismay of most savers.

If you take Japanese interest rates as an example of how long interest rates can actually remain at record lows it really makes you think….although the UK economic position is different to that of Japan I am sure they didn’t expect rates to remain so low for so long!

Japan Interest Rate Graph

We have carried out market research to identify some of the market leading instant access and fixed rate deposit accounts available off and onshore.  I’m afraid these don’t make for particularly pleasant reading when you are looking to achieve inflation plus returns.

 

ONSHORE

OFFSHORE

Instant access

Instant Access

Nottingham Building Society

1.71%

Nationwide International

1.50%

Tesco Bank

1.50%

Britannia International

1.25%

Post office

1.50%

Lloyds Bank International

1.00%

1 Year

1 Year

Virgin Money

1.91%

permanent Bank International

1.85%

Post Office

1.90%

Nationwide International

1.70%

Tesco Bank

1.90%

Santander

1.40%

3 Year

3 Year

Shawbrook Bank

2.65%

permanent Bank International

2.15%

Tesco Bank

2.55%

Santander

2.00%

Virgin Money

2.40%

Nationwide International

1.80%

5 Year

5 Year

Vanquis

3.12%

Conister Bank International

2.50%

Virgin Money

3.00%

permanent Bank International

1.92%

Tesco Bank

3.05%

Norwich & Peterborough International

1.90%

 

The table below highlights the rate of inflation over the last 2 years which clearly shows the frailties of holding money on deposit.

UK Inflation Rate Graph

It is vitally important to understand that when your savings are earning less interest than the current level of inflation it means that as time passes you will be able to buy less for the same amount of money. Prices will have risen by more than your savings have grown thus eroding the value of your cash.

If you have £100,000 in a savings account that pays 0.5% interest, then in a year you may have gained £500 in interest.  However, once you take into account that the price of goods and services has risen by 2.2% (the current rate of inflation) then your £100,000 will actually only be worth £97,800 in a year’s time; £98,300 with the £500 in interest. The current level of inflation means that interest rates are effectively negative, meaning the money that you are saving for that relaxing holiday or new car is slowly being eroded, and without action you may not be able to achieve your goal or may have to save for a longer period of time.  If you expand this over a period of 10 years, which is possible given some analysts’ predictions, then you would see the following.

table

As you can see the effect of inflation can be devastating which means it’s crucially important to seek advice and invest, to ensure your savings are appropriately inflation hedged to protect your goals and aspirations.

Pensioners and people on the cusp of retirement could well be the worst hit, as they may no longer be able to afford the lifestyle they have, or had aspired to in their ‘golden years’.  Although there is a tendency for older people to stay away from higher-risk investments, I think it’s time to act now and reduce holding large quantities of cash, and undertake a more diversified investment strategy.

If interest rates remain at this level for a long time to come, relying on interest earned from cash savings is no longer a viable retirement option, in order to live a comparable lifestyle and maintain spending power.

Mike CoadyMike Coady
Mike Coady
No Comments

Leave a Reply

Contact Mike




%d bloggers like this: