How much cash have you got stashed away for a rainy day? Cash savings are an essential part of any investment portfolio – providing liquidity and necessary diversification. Yet nearly 10 million Britons have no savings at all. Despite inflation falling to below the Government’s official target rate, lack of wage growth has meant households are still feeling the squeeze.
The average saver has a cash buffer of £20,380 according to high street bank Santander, although this falls to £13,070 for women compared to £28,079 for men when analysed by gender. On average we save £110 a month – but all this is set to change when interest rates rise.
Chancellor George Osborne has strung a noose for his own neck – his austerity measures have so improved the UK’s economy he has little choice but to raise interest rates before the next election. Although in theory an interest rate rise is good for savers, the reality is not as simple.
Since the credit crisis the savings rate has been falling meaning we are saving less of our wages. As well as saving less, the nation’s financial obligations in the form of mortgages and credit card payments have fallen.
Debt rates have been kept low – temporarily reduced by record low interest rates, making five-year fixed rate mortgages with a rate of 2% the norm.
However, when the Bank of England is forced to finally raise rates households across the UK will feel the hit – and an extra percentage point interest offered on their savings will be of no consequence.
Susan Hannums from Independent Savings Advice site Savingschampion.co.uk said savers were desperate for a rise in the base rate following over five years of record low interest rates, but they should proceed with caution.
“There is now little correlation between savings rates and the base rate that it may be naive to think all savers will reap the full benefits of a base rate change, but borrowing costs tend to increase by at least the full amount of any change in the base rate leaving less pounds in the pockets for those savers,” she said.
What’s more an interest rate rise could not just knock investors’ budgets off-course, but the economy too. According to Threadneedle head of UK equities Simon Brazier the single biggest factor driving GDP growth is consumer spending.
“This Government has taken its biggest bet on the consumer,” said Brazier talking at the Morningstar Investment Conference this week.
“The savings ratio has fallen since the economy has picked up - and there has been no wage growth. House prices have driven consumption thanks to Osborne driving up the market up with buyer-friendly policies. As a result consumption has risen and the economy has profited. But interest rate rises will put an end to this trend.”
Ten year gilt yields have risen since 2012, and Brazier calls this the “true base rate” off which interest rates are based.
“Over the past five years, the proportion of our wages we spend on our mortgage has fallen, so we have had more to spend - propping up the economy. If there is a 1% interest rate rise, 10% of the mortgage book becomes impaired – meaning 10% of people will have to change their habits to afford their mortgage - and spending has to slow. Rising interest rates will stop this recovery dead.”
