Skipton Financial Services
Friday, March 29, 2019 - 10:01

The new norm of interest rates

It’s just over a decade ago that the Bank of England were grappling with the consequences of 2008’s unfurling financial crisis,  causing turmoil to markets and the world’s largest economies.

As a result, over a short space of time, the Bank of England reduced the base rate from 5.75% to 0.5% - less than a tenth of what it had stood at the year before, and at the time the lowest ever recorded in the 300-year history of the Bank. Since then the base rate has barely shifted, dipping to 0.25% for a year, before limping slightly upwards in August 2017.

In light of the crisis, rates were slashed to cushion the economy by cutting the cost of borrowing for millions of businesses and mortgage customers, with the hope of freeing up cash for consumer to spend on the economy. At the same time, the Bank also pumped extra money into the economy by buying government bonds.

Before the crash, banks relied on raising funds from the public which could then be lent out to borrowers, meaning the banks had to compete by offering good savings rates. However, with so much money available from the central bank, there was no longer any need to chase savers for their cash, and consequently savings rates were reduced.

These measures ensured the financial system kept functioning – but it also marked a radical change from the traditional banking model. The reduced interest rates were intended to be taken as a short-term measure – something to keep as many businesses and consumers afloat as possible. However, the base rates didn’t rise again until November 2018 and even now it stands at only 0.75%.

A drop in returns

The last 10 years of low interest rates has seen the average rate paid by all providers to savers with easy-access accounts swing between 0.35% and 1.14%. As a comparison, in September 2008, the average easy access account paid 3.08%, today it pays just 0.54%^.

Research has also shown that savers have missed out on £188 billion worth of interest over the last decade – costing the average UK household £7,101. Furthermore there’s currently £166 billion in savings held in bank accounts, receiving no interest*.

Here to stay

At this moment in time, all indications are pointing to low interest rates being here to stay for many years to come, with one of the Bank of England’s leading policy experts predicting them to last for another 20 years. Ian McCafferty, commented on how structural changes in the global economy means UK borrowers and savers should get used to interest rates being significantly below the 5% average that existed in the 10 years leading up to the financial crisis>.

Investing for your long-term goals

Regardless of the decade of low savings rates, it hasn’t stopped thousands of people using their savings account as an aid to try and reach their long-term goals, when investing money might achieve better returns.

Philip Graves, a consumer behaviour expert and author, told Skipton how people tend to feel more focused on savings in the sense of a squirrel storing its nuts. “They don’t see the process as an investment; they see it as simply putting something away. So they feel good if they’re adding to the stack, and maybe feel bad if they’re taking something away from the stack. But what makes them feel good or bad is very much focused on them, not the return they’re getting.”

There’s no doubt that savings accounts are useful for short-term goals. It’s always important to have a portion of money in an easily accessible account to act as an emergency fund. This can prepare you for any unforeseen circumstances, where you need to access your money straight away.

However, if you’re receiving an interest rate that you know won’t be enough to reach your financial targets, you could be setting yourself up to fail. When it comes to money that is important to you for long-term objectives, you may be best considering alternative options.

Investing your money in stock market-based investments offers the potential to achieve stronger returns. It could make a difference to saving towards your retirement, supporting yourself during retirement or preparing and planning a financial future for your family when you’re no longer here. It may even be a more efficient way of saving towards that once in a lifetime holiday you want to venture on in 10 years’ time.

Providing you’re able to tie up your money for at least five years, and you are willing to accept risk to your capital, as the value of your investments may fall as well as rise, seeking advice on investing could help you to improve your financial future amid a long-term climate of low interest rates.

^This is Money – ‘Savers miss out on £188bn worth of interest’ 2019

*Money Age – ‘Savers lose £188bn in interest in past decade.’ 2019

>Bank of England – ‘Changing times, changing norms’ – 2018

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