Three years of low interest rates: winners and losers

As the 0.5% bank rate reaches its third birthday, Robert Powell reports on the winners and losers from low interest rates.

It’s a birthday you may have missed: three years of an ultra-low Bank of England base rate.

Yes, 36 months ago today Mervyn King and the Monetary Policy Committee cut the official bank lending rate to its current historic low of 0.5%.

The decision has divided the public over the past three years into clear camps of winners and losers. Most obviously: borrowers versus savers.

Winners: borrowers

The base rate is the interest rate charged by the Bank of England for lending to financial organisations. If the base rate rises, so do the interest rates you and I pay when we borrow money.

As a result, a low bank rate benefits those with large loans. And the largest of all loans are mortgages.

Adrian Coles, Director General of the Building Societies Association, said: “Mortgage rates have been lower than they’ve been in virtually the entire post war period. Some building societies have had standard variable mortgage rates of 2.5% when the inflation rate has been 5%. If you’ve got a good deposit as a new first-time entrant to the housing market, [the low base rate] has also been very beneficial.”

But Mr Coles also said that some homeowners who bought at a high loan-to-value before the credit crunch have lost out. Figures released late last year from HSBC showed that 360,000 young people are ‘trapped’ in their first property, after buying at the peak of the market and seeing house price drops wipe thousands off the value of their home.

However the largest group of losers from the 0.5% base rate are savers.

Losers: savers

The low base rate has dragged down the returns available to savers. Figures from the Bank of England show that savers can now earn just 0.61% from a typical cash ISA and 0.2% from a typical savings account.

To add insult to injury, inflation has also swelled over the last three years, meaning that savers have struggled to protect their nest-eggs from rising prices. Retirees living off a fixed income have been hit especially hard as annuity rates have plunged.

Campaign group Save Our Savers estimates that the 0.5% base rate has cost savers £76 billion over the last three years. Simon Rose, a spokesperson from the campaign, said: “Savers as a whole are the ones who have paid for the effects of the recession, which many of our members consider very unfair.”

The group wants to see the Bank of England indicate to people that rates may go up and is calling on the Government to introduce a moratorium on income tax on savings.

So should we be expecting to see a sixth 0.5% base rate birthday?

A sixth birthday

For as long as the base rate has been fixed at 0.5%, commentators and economists have been tussling over the timing of future rate rises. And while no one has a concrete answer, there is something of a broad consensus that the rate will not budge for a while yet.

Vicky Redwood, UK economist at Capital Economics said: “The economic recovery is still looking pretty fragile and inflation is set to fall very sharply. Given all that, the Bank of England will probably want to keep interest rates very low for quite a long time yet.”

Have you won or lost?

Have you been a base rate winner or loser?

Let us know using the comment box below.

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