New Governor of the Bank of England blows raspberry at savers
The new Governor of the Bank of England, Mark Carney, has 'hit the ground running' and made it very clear that the base rate will stay unchanged for some time to come. This is rotten news for savers.
The news that base rate would remain at 0.5% was no surprise. The same goes for the decision to leave quantitative easing (QE) or ‘money printing’ unchanged at £375 billion.
But the commentary in the Bank of England’s press release was a surprise. Normally we just learn the bare facts at this point – further explanation of the bank’s thinking usually comes a few weeks later with the publication of the minutes from the meeting. However, today’s statement included much more analysis and commentary than you’d normally expect.
This is the killer line: “In the Committee’s view, the implied rise in the expected future path of bank rate was not warranted by the recent developments in the domestic economy.”
Gobbledygook
If that sounds like gobbledygook, let me explain….
The first point is that any economy will always have short-term interest rates and long-term interest rates. In the UK, short-term rates, such as those paid on an instant access savings account, are normally closely linked to the Bank of England’s base rate.
By contrast, long-term rates are set by the financial markets rather than the Bank of England. When market traders make their deals on long-term rates, they’re essentially making bets on where they think the base rate will be in five or 25 years’ time.
In recent weeks, long-term rates in both the UK and US have been going up. That’s largely because the head of the US central bank, Ben Bernanke, had hinted that he might wind up QE in the US earlier than expected.
In this statement, Carney and his committee are saying they think the market has got it wrong. The line of gobbledygook that I quoted is saying that long-term rates have risen too high, and, by implication, that means that Carney has no intention of pushing up short-term rates (i.e the base rate) any time soon.
The market has already reacted to this statement: long-term interest rates are now falling, the pound is down while share prices are on the up.
What’s more, some economists are now predicting that we may see an increase in QE next month. Carney may also give more detailed ‘forward guidance’ at that point which could include an explicit guarantee that the base rate won’t rise for a year.
What does this mean?
So what does this mean for most people?
Well, it’s clearly rotten news for savers. The rates on all kinds of savings accounts will remain far too low for at least another year. Probably longer. It’s also bad news for anyone who is planning to buy an annuity soon.
And the falling pound means that holidaymakers may have to pay a bit more for their euros or dollars.
However, the statement is much better news for anyone who is planning to buy a house or thinking about remortgaging. Until now, there had been a feeling that we might be at a turning point in the mortgage market with fixed rate mortgages, in particular, looking set to rise.
I’m now pretty sure that the turning point has been postponed until 2014 at the earliest. Don’t get me wrong, the current rates on fixed rate mortgages are amazingly low, and they weren’t last forever.
But equally, I don’t think there’s any need to get in a mad panic on the basis that mortgage rates will change dramatically in the next few weeks. Homebuyers can still take their time to find the right property and the right mortgage deal.
What’s more, the falling pound will help any company that does a lot of business abroad. If this fall is sustained, exporters will be able to cut their prices in overseas markets.
But before we get too carried away, it’s important to remember that Carney is taking this stance because he thinks that the UK economy is still weak, so there’s plenty for everyone to worry about.
And for the people who rely on their savings for income, this is terrible news. Their plight is clearly nowhere near the top of Carney’s priority list.
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