When the Bank of England reduced the base rate to a record low this month, there was one, tiny consolation for savers. The governor, Mark Carney – almost the only individual to have emerged from the Brexit shambles unscathed – said he was “not a fan” of negative interest rates. He thus seemed to rule out the nightmare – for anyone even just in the black – that we would have to pay the banks for keeping our money, rather than the other way round.
Carney’s effective rejection of negative rates – as already introduced in Japan and Sweden – was welcome. But it does little to help UK savers, who are recommended, in that infuriating phrase, to “shop around” for higher rates. Shop around if you like, but I was recently informed by two banks that rates were being reduced below 0.5%, and short of entrusting your cash to an emerging market, real options are few.
If the next thing is overt, as opposed to covert – charging for current accounts – then we will be in negative territory in fact if not in name. Then what? Despite everything I was brought up to believe, stashing cash under the mattress suddenly looks like sage planning.
The catastrophic fall in returns to savers over the past few years is, of course, a long-term consequence of the financial crisis; but a grievously neglected one. Each time rates have been reduced, the loudest voice has been that of creditors and their advocates. The supposed rationale is that low rates will get us all spending so as to get the economy growing again.
For those acclimatised to living not just with mortgages at absurdly low levels, but with overdrafts and credit-card debt as well – the benefits are evident. The cost of servicing that debt is reduced, and repay-day is again postponed. Small matter that the credit bonanza of the early 2000s was a direct cause of the financial crisis, and that we are also being urged to save for our retirement: ever-cheaper credit remains the economic growth hormone of choice.
For those of us told from childhood not to live beyond our means, who have also done our best to save for retirement, the potential effects are dire. Whenever I hear any mention of a new round of quantitative easing or a cut in interest rates, another dark cloud appears on my financial horizon – and not mine alone. We were led to expect a return on our savings that would supplement our pensions; a half of 1% even on a goodly sum will not do that.
Those now contemplating retirement on private sector, non-final salary, non-index-linked pensions – the majority – will see the rewards for their prudence not just trimmed, but slashed.
With interest rates low, investment funds look attractive
All the talk of intergenerational strife and the “plight of the millennials” omits the betrayal and impoverishment of savers, who are mostly older and have no means of increasing their income. What use is cheap credit to them? You don’t get a 1% tracker mortgage on care home fees.
The focus on house prices as the evil of evils for the young is also misleading. Low interest rates have helped push up housing costs in areas of high demand by making mammoth mortgages affordable. Saving for a deposit is the problem, and low interest rates don’t help.
There are signs, though, that the doctrine of ever-lower interest rates may be starting to run out of road. In the Financial Times last week a fund manager dared to challenge the orthodoxy that low interest rates necessarily stimulate demand. In the same paper, a reader argued that lower rates made him sit on his savings rather than spend. I suspect it has the same effect on others.
There are surely compelling reasons for a rethink. Reducing the cost of borrowing has not, in fact, led to a consumer boom, nor even to more modest growth. Without a perceptible rise in their incomes, it would seem that most people err on the side of caution. Either that, or their credit, however cheap, is maxed out.
We savers, meanwhile, are hanging on to what we have, for fear of even worse returns, and perhaps higher inflation, to come. Nor are negative rates likely to change this. The Japanese have not gone out to spend, even though this might seem a logical response; the result has rather been less money in banks and more, it is assumed, under beds.
So if ultra-low interest rates are not stimulating growth, and if they are simultaneously undermining messages about sound money and saving for retirement, how about trying the opposite? A rise in rates, perhaps?
The very idea would, of course, be greeted by warnings about mortgage defaults, repossessions, and hitting the poor disproportionately. But low rates tend not to benefit those on the brink; and an initially modest rise would offer a salutary reminder that borrowing has a cost. It could also exert downward pressure on house prices.
More immediately, it could encourage those of us in the black to indulge in a spot of so-called discretionary spending. In all, we could be reaching a point where the pluses of a rate increase outweigh the minuses. For savers, that point can’t come soon enough.