Ultra-low UK interest rates hit eight-year anniversary
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|
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|
|FTSE All Share||192.30%|
|UK Consumer Price Index||18.40%|
|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.
- Read How to inflation-proof your investments and The best ways to beat inflation if your wealth is vulnerable to this.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
Lower interest rates encourage people to spend, not save. But when interest rates can go no lower and there is a sharp drop in consumer and business spending, a central bank’s only option to stimulate demand is to pump money into the economy directly. This is quantitative easing. The Bank of England purchases assets (usually government bonds, or gilts) from private sector businesses such as insurance companies, banks and pension funds financed by new money the Bank creates electronically (it doesn’t physically print the banknotes). The sellers use the money to switch into other assets, such as shares or corporate bonds or else use it to lend to consumers and businesses, which pushes up demand and stimulates the economy.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
The familiar name given to securities issued by the British government and issued to raise money to bridge the gap between what the government spends and what it earns in tax revenue. Back in 1997, the entire stock of outstanding gilts was £275bn; by October 2010 it had surpassed £1,000bn. Gilts are issued throughout the year by the Debt Management Office and are essentially investment bonds backed by HM Treasury & Customs and considered a very safe investment because the British government has never defaulted on its debts and this security is reflected in the UK’s AAA-rating for its debt. Gilts work in a similar way to bonds and are another variant on fixed-income securities.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.