“The UK’s seven year income famine”

17th March 2016


Maike Currie, investment director for personal investing at Fidelity International, looks at the impact of seven years of interest rates being stuck at 0.5%…

With recent manufacturing and construction sector data disappointing and reports that the service sector is faltering, there’s little doubt that the UK economy is slowing.

Accordingly, there have been suggestions that interest rates might be cut to zero.

But today’s Monetary Policy Committee (MPC) announcement shows that the Old Lady of Threadneedle isn’t quite ready to make this move, despite many developed world central banks joining the negative interest rate club.

Once again, the MPC unanimously voted in favour of keeping rates at 0.5%. This marks the seven-year anniversary of UK interest rates lingering at a historical low.

With all members of the MPC voting unanimously to keep interest rates at half a per cent and with recent UK economic data disappointing, a rate hike remains off the cards. Indeed, the Bank of England could cut interest rates to zero, an option which governor Mark Carney has not ruled out entirely.

Seven years of record low interest rates has meant a relentless income famine for savers, particularly those who have stashed their saving in cash ISAs.

Our analysis shows that back in April 2009 there was some £15.8bn sat in cash ISAs – had savers kept this money sat in these accounts, which have offered increasingly lower rates over the past seven years, that money would now be worth just £178.68bn.

However, had this money been invested in the FTSE All share, it would now be worth £307.78bn.

That means investors have potentially lost out on a whopping £129.1bn of returns over the past seven years.

With no signs of an interest rate hike any time soon and a genuine possibility that rates might even be cut to zero, income starved investors are likely to continue to turn to stocks and shares and UK equity income funds as a rare source of yield.

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