The Bank of England’s monetary policy
committee has decided to hold the base
rate at its record low of 0.5%, despite
widespread market anticipation of a rate
cut.
Eight of the nine panel members voted to
hold the Bank of England’s base rate at
0.5%, with one member voting to cut
rates to 0.25%.
Many, if not most, financial experts were
expecting the Bank of England to cut the
base rate to stabilise the economy in
response to the UK’s recent decision to
leave the European Union.
Hargreaves Lansdown said earlier this
week that the markets were implying an
80% chance of a rate cut, while Blackrock
said it anticipated a rate cut of between
0.25% and 0.5%.
Maike Currie, director for personal
investing at Fidelity International says:
“Much like the Brexit result, the Bank of
England has defied market expectations
by choosing to maintain interest rates at
0.5%.
However, rates could still fall in future and
a rate cut in August can’t be ruled out,
according to Adrian Lowcock of AXA
Wealth.
He says: “The outlook for interest rates
are still towards a further cut, possibly as
soon as August, as early indicators point
to weakening consumer and business
confidence and a significant slowdown in
activity in the housing market.”
What does it mean for savers?
Given the base rate has not moved for
seven years now, no change may not
seem significant to savers.
However, rates available on savings
accounts have recently been hit hard as
banks and building societies prepared for
the expected rate cut. Earlier this week
Moneyfacts reported that the average rate
on one-year fixed rate savings accounts
had fallen to 1.14%, down from 1.4% in
January.
However, while the lack of a base rate cut
may put the brakes on rate cuts to
savings accounts in the short-term, the
outlook for savers remains challenging.
Mr Lowcock says: “Savers continue to
suffer from record low interest rates and
will do so for some time to come. Things
are likely to get worse with inflation
expected to return as the recent rise in oil
prices, but more importantly the fall in the
pound drives up prices eroding the value
of cash.
“Inflation is insidious as it slowly erodes
the spending power of savings and since
interest rates were cut to 0.5% in March
2009, an average cash account has
already lagged behind inflation by over
11%.”
Ms Currie suggests cash savers may want
to consider investing instead: “Savers and
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.”
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What does it mean for borrowers?
David Hollingworth, associate director at
mortgage broker London and Country,
says fixed rate mortgages, particularly
long term deals, have already been falling
in the run up to today’s announcement.
He says: “Fixed rates have already
reacted to market expectations of rates
staying lower for longer due to the
uncertainty around Brexit. That has
started to move into fix rate deals,
particularly in the longer term, such as
the launch of the new [record low] deal
from Coventry Building Society .
“Eyes will now turn to August’s meeting to
see if that might result in further
loosening of monetary policy. Whether
that turns into a rate cut remains to be
seen, they might consider more
quantitative easing (QE).”
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What does it mean for retirement savers?
Ms Currie says that the base rate holding
at record low levels is an indication of
fundamental changes to the world of
pension saving.
She says: “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.
“Low investment returns mean people
may want to think about staying in riskier
asset classes for longer as they approach
retirement to get better returns, she adds.
“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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