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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Sorry I can't afford food for me kids. Not after getting credit on me phone, buying me fags and having the occasional beer. We all deserve that innit? With the level of welfare benefits in this country no-one needs food banks, they just need to use their income to buy essentials before luxuries.
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I think balance would also be not to forget the kids whose parents are having trouble feeding them and have to go to food banks. No I am not a leftie which is what will be aimed at me - in fact I voted for UKip in the last elections so some will say I am extremist right. I am neither. I try to look at a fair society and would go along with the "we are all in it together" if it were true but unfortunately we see bankers getting extreme bonus's and the MP's of all parties accepting a large pay rise - and the M.P's threatened to disband the so-called Independent Committee over expenses so they have already proved that they will do what the M.P's want and so they are hardly independent. They also always compare the M.P's salaries to consultants salaries but I have yet to see an MP mend a faulty heart or cure a cancer....M.P's do not save lives on a daily basis. The same applies to Union Bosses/heads of Charities who claim large salaries and of course, MEP's. I do not have any sympathy for those who choose not to work because they are lazy but every sympathy for those who have no choice in the matter.... oh and I haven't had a pay rise in 4 years now and I don't earn anywhere near what an MP earns but do have a job that requires me to be responsible for others and I am also a widow, so if any tax cuts come they will only be pennies out of my tiny salary but will be £100's/£1,000's of pounds to the high rollers. I agree business needs to be encouraged (creates a symbiotic relationship) but do let us get back to being fair and not such a selfish society. Let's help those at the bottom of the pile and not just those at the top who are busy helping themselves.
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Oh dear, the doom merchants are out in force on this one! Low mortgage rates, a recovering economy and stock market close to historic highs. A balanced investment portfolio can be in excellent shape at this time. We just need to keep the Tories in power and we'll see falling tax rates to complete the utopia.
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19 July 2013