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No Respite for Savers as Interest Rates Remain at 0.25%

Interest rates remained unchanged today at 0.25%, while the Bank of England forecast inflation to peak at 3% in October

Karen Kwok 3 August, 2017 | 4:00PM

The Bank of England’s Monetary Policy Committee has voted to leave interest rates on hold. The UK Central Bank also lowered its inflation, growth and wage forecasts in an announcement today. Sterling fell against the euro to a nine-month low of €1.11.

The MPC voted 6-2 to keep the bank rate unchanged at 0.25%. It has been 12 months since the Committee voted to cut the bank rate to that record low level, following the UK voted to leave the European Union in the Referendum. The £436 billion government purchase programme and £10 billion corporate bond purchase programme remained unchanged.

Inflation Will “Rise to 3% in October”

In its inflation report, the Central Bank cut its economic growth prediction for 2017 to 1.7% this year from a prediction of 1.9% made in May, while forecasts for 2018 fell to 1.6% from 1.7%.

The bank also forecast the inflation rate falling to 2.6% in a year after it peaks at 3% in October. It expects wage growth to grow by 3% in 2018, down from the 3.5% projection made in May.

Bank of England Governor Mark Carney said in a press conference that business investment was slower than expected thanks to Brexit.

“It's evident in our discussions across the country with businesses that uncertainties about the eventual relationship are weighing on the decisions of some businesses,” said Carney.

UK Central Bank Remains Dovish

While the Bank of England kept interest rates on hold as expected, there was some market nervousness about how many members would decide to vote in favour of a hike, said Ian Kernohan, an economist at Royal London Asset Management.

“The MPC has kept the window open for an earlier than expected interest rate hike. However, we still think interest rates will remain on hold until there are clearer signs of a pick-up in wage growth and we get some visibility on the likely impact of Brexit on the economy,” said Kernohan.

Matthew Brittain, investment analyst at Sanlam UK, expects the UK central bank to remain dovish as the impact of the weaker pound becomes fully reflected in inflation data over the course of the next 12 months, allowing it to naturally drift back in line with global averages.

“This marginally more dovish sentiment has no doubt also been helped by the departure of long-time hawk Kristin Forbes, and puts the bank firmly back on track to its ‘slow and steady’ normalisation approach,” said Brittain.

Cash Remains Trash

The latest inflation rate for June is 2.6%; not one savings accounts beats or even matches this level of inflation, data provided by price comparison websites Moneyfacts.co.uk and Savingschampion.co.uk show.

Since the end of last year, the best easy access rate account available has risen by 25% and fixed rate bonds have risen even more – but it is not enough to offer savers a real rate of return. Best buy one year fixed rate bonds are up by 36% and three-year bonds are up by nearly 39%. Savers can earn well over 2% now, better than saving rates available among high street banks, but these rates are still not better than inflation, said Anna Bowes, Director of SavingsChampion.co.uk.

“Cash remains trash in today’s environment. With this in mind, anyone with savings still sitting in cash will continue to struggle to generate a real return,” said Tom Stevenson, investment director for Personal Investing at Fidelity International.

For anyone is still unsure about the benefits of investing in stocks and shares over saving in cash, Fidelity’s calculations dispel any doubts. Investing £15,000 into the FTSE All Share index 10 years ago would now be worth £25,270, but £15,000 in the average UK savings account over the same period would be worth £15,691.

“That’s a difference of £9,579 – too big for any sensible saver to ignore,” said Stevenson.

The Best Saving Rate: 2.15%

There is some good news for savers; as the ‘challenger banks’ have been very active this year, and rates have been rising steadily across a range of accounts including easy access for a change, said Bowes.

“Without this competition, the savings market would have been even more dismal. The important thing to remember is that it is the challenger banks that are driving these rate rises, while the high streets are happy to sit back and pay their loyal savers paltry rates. Our advice is to shop around for the very best rates and don’t let your bank rip you off,” said Bowes.

The best cash ISA account on the market pays 2.15% from Charter Savings Bank, a five-year fixed-rate cash ISA, according to data compiled by Moneyfacts.co.uk. Any early access is subject to 270 days loss of interest.  

The best cash ISA easy access account is also from Charter Savings Bank. It offers a rate of 1.02%.

Savers who are looking to lock money up for a shorter period could consider United Trust Bank’s two years bond and Paragon Bank’s two-year fixed rate savings account, both paying a rate of 2.05%. There is no access within the term.

An alternative way for savers to get a higher saving rate is by setting up high-interest current accounts. Nationwide Building Society’s flexdirect current account includes a 4% bonus for the first 12 months, after which the rate will reduce to 1%. At least £1,000 must be paid into the account each month to qualify the bonus. The 4.89% interest rate is only paid on balances up to £2,500. Balances above £2,500 will not receive any interest.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk