5th March 2015
Interest rates have officially been stuck at their historic low for six years with the Bank of England’s Monetary Policy Committee (MPC) today voting to keep the cost of borrowing at 0.5%.
The MPC originally slashed rates to 0.5% – a 300 year low – back in March 2009 in a bid to stimulate the British economy during the height of the financial crisis.
Given the current backdrop of very low inflation, with the cost of living hitting the lowest level on record, the Bank is under no real pressure to hike rates anytime soon.
The latest numbers from the Office for National Statistics showed that inflation, as measured by the UK Consumer Prices Index (CPI) slumped to 0.3% in January, from 0.5% in December. The primary drivers of the fall were cheaper food, aided by a supermarket price war and lower petrol prices on the back of the collapse in the oil price.
The Bank of England has already warned that inflation may temporarily slip into negative territory around spring time.
Presently it is far from clear as to when interest rates will rise, as some commentators predict later this year, while others say they do not expect any movement until 2016.
Tilney Bestinvest’s managing director Jason Hollands highlights that the prolonged period of low interest rates has had a mixed impact on consumers. He said: “This week marks the sixth anniversary of the Bank of England cutting the UK base rate to an all-time low. The winners during this period have been borrowers, both at the personal and corporate level, as well as owners of assets such as shares and property which have benefited from a prolonged period of ‘cheap money’.
“The losers however have been the nation’s army of frugal savers who have endured the misery of derisory interest rates and negative real returns after the impact of inflation for a prolonged period on their cash deposits.”
In fact in the six years since March 2009, inflation has risen 17.94%, which has ultimately eroded the value of cash, where before any interest is earned, by an average of 2.79% per annum.
Maike Currie, associate investment director at Fidelity Personal Investing added: “Savers have been the ultimate losers from the low interest rate environment with their cash pots going nowhere.
“If someone had predicted this in March 2009 they might not have been taken seriously. But anyone who had looked closely at the trajectory of interest rates after debt-driven financial crises should not have been so surprised. Rates were stuck at 2% for around 20 years from the 1930s to the 1950s. Recovery from these crises can be a long hard slog.”