Savers Suffer Six Years of Record Low Interest Rates

While the official rate of inflation now sits at its lowest ever level of 0.3%, over the past six years it has not been so forgiving for depositors, eroding the value of their cash

Emma Wall 3 March, 2015 | 2:29PM
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Six years ago the Bank of England made the unprecedented decision to lower interest rates to just 0.5%. Just one year earlier base rate had been 5% and some high street banks were offering cash savings rates of up to 8%.

But then the credit crisis took hold, banks went bust and stock markets around the world plummeted. Developed market Central Banks reacted by dropping interest rates and pumping markets full of quantitative easing – to the dismay of savers.

While the official rate of inflation now sits at its lowest ever level of 0.3%, over the past six years it has not been so forgiving for depositors, in September 2011 it was as much as 5.2%, for the whole of 2010 it was at least 3% and last year it hovered around 1.7%. These figures dwarf the rate of interest, meaning that savers’ cash was earning a negative real rate of return.

According to calculations by AXA Wealth, inflation has eroded the value of money by nearly a fifth since March 2009 when base rate was first dropped to 0.5%.

“In the six years since March 2009 CPI inflation has risen from 108.7 to 128.2,” explained Adrian Lowcock, Head of Investing at AXA Wealth.

“This means prices have risen 17.94% in six years. Inflation has eroded the value of cash, before any interest is earned, by an average of 2.79% per annum. Inflation even at low levels has taken near fifth of the value of money and eroded cash after interest by 13.2%.”

Back in July 2009, after just three months of low rates, market forecasters predicted that base rate would rise back up to 4.5% by January 2013, according to data from the Bank of England. By January 2014, market forecasters were more bearish, but they predicted that rates would be back up to just shy of 3% by July 2018. Now however, the forecast looks bleak – the consensus view is rates will rise, but only to a paltry 1% and not until 2019.

Anna Bowes, Director at Independent Savings Advice Site, SavingsChampion.co.uk said that savers now had to be proactive and shop around for the best rates if they wanted a decent return on their savings.

“According to the recent FCA Cash Savings Study, there is over £160 billion in easy access savings accounts paying 0.50% or less and a further £12 billion is in cash ISA accounts paying these derisory rates too – much better rates can be found elsewhere,” she said.

“Many savers may be disillusioned with savings rates but savvy savers will use all the tools in their armoury including high interest paying current accounts paying up to 5% interest, which just goes to highlight that it’s still well worth switching your savings.”

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.

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Emma Wall  is former Senior International Editor for Morningstar