Ultra-low UK interest rates hit eight-year anniversary

Low interest rates

A look through the Moneywise archives reveals that 5 March has never been a particularly eventful day – that is until 2009 – when the Bank of England cut interest rates from 1% to 0.5% following the financial crisis that started in 2008.

They stayed at this historic low for over seven years until 4 August 2016 when they were cut to 0.25%. This is all the more extraordinary when you consider that 10 years ago today the base rate stood at 5.25%.

This near decade of low interest rates has resulted in cheap mortgages but extremely low rates for cash savers. For the average person, the only way to see a return on their money is to either invest or take a more active approach to managing their money.

Then and now: house price versus salary growth

But while 2008 and 2009 sound quite recent to some, as novelist L.P. Hartley said: “The past is a foreign country; they do things differently there.” Here are some differences to think about:

UK End of 2008 End of 2016
Average median salary (full time) £25,165 £27,615
Average house price - London £254,000 £484,000
Average house price - England £166,000 £236,000
Average house price - Wales £129,000 £148,000
Average house price - Scotland £126,000 £142,000
Average house price - Northern Ireland £154,000 £125,000
Isa limit £3,600 £15,240

Then and now: investing versus cash returns

Along with ultra-low interest rates, wesaw the start of something called quantitative easing (QE). This programme continues to run to this day, albeit in a modified form. It’s a hugely complex operation, but in short, the Bank of England began buying government debt in vast amounts with the aim of putting more cash into the banking system, theoretically encouraging businesses to spend an invest more. Whether it has been a success or not will only be answered with hindsight.

Hargreaves Lansdown has provided some figures on the impact on cash savings, investments, and certain price indices.

Asset Total return since 5th March 2009
Cash* 5.40%
Corporate Bonds 108.90%
FTSE All Share 192.30%
Gold 56.10%
UK Consumer Price Index 18.40%
UK Gilts 57.10%
UK Nationwide House Price Index 38.20%

Source: Lipper IM

*Moneyfacts Average Instant Access Savings

Interestingly, within this time period, of households that are in debt, the average amount has risen only slighly from £2,800 to £3,400.

Laith Khalaf, senior analyst at Hargreaves Lansdown, adds: “While still sluggish, the UK economy is at least still heading in the right direction. Borrowers have also benefited from low interest rates, which in turn has helped to support the housing market and hence the wealth of homeowners across the country.

“QE has made debt cheaper for companies, and has supported the stock market, which has made tremendous gains since QE was introduced. Not all of the rise in the stock market can be attributed to loose monetary policy, but QE has injected liquidity into the market, kept the wheels of the economy turning, and made the dividends offered by equities look attractive when compared to bond and cash yields.”

What about the future?

Despite speculation heating up that Stateside interest rates will rise back to ‘normal’ levels soon – and with the implicit reasoning that the UK follows America – others aren’t so convinced, believing that what we’re seeing in the UK is in fact the ‘new normal’.

Of particular note is star fund manager Neil Woodford, who says: “I would be willing to bet that Mark Carney (the Bank of England governor) will leave his position in 2019 having never increased interest rates. Quantitative easing may go, but rates are not going up."

It’s not as gloomy in other quarters though, with Moneywise columnist Jeff Prestridge predicting a smoother ride for savers. This is despite inflation on the rise, which eats into the value of what you hold today.

 

 

 

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