Martin Lewis discusses negative interest rates
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Savings rates and mortgage deals are largely impacted by what the BoE sets as the base rate. In early August, the BoE kept the base rate at 0.1 percent, the lowest it has been in its history.
Giles Coghlan, the Chief Analyst at HYCM, reflected on this and examined what could be on the horizon for savers.
Mr Coghlan said: “Any suggestions of a hawkish shift from the Bank of England’s policy makers did not come to pass.
“Even with inflation on the rise, and warning it will exceed four percent by the end of the year, the central bank has stuck to its quantitative easing policy and kept interest rates at historic lows.
“In itself, this is no surprise. But the devil was always going to be in the detail, with investors keen to see how the vote played out.
“Many thought there would be a 6-2 or 5-3 vote in favour of continuing quantitative easing purchases as planned – in reality, they backed this option by a margin of 7-1, so even more dovish than thought.”
Mr Goghlan went on to break down when he thinks interest rates will rise: “For now, the Bank of England is sitting tight and refusing to veer away from its schedule.
“And it seems that the Bank has maintained its stance from June, which is that inflationary issues are short-term and will fall again in 2022, with the first interest rate hike arriving no sooner than a year’s time.
“Yet some onlookers will be wary of the widening gap between the base rate and inflation.
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“GBP rose in advance of the decision being announced. Given how things have unfolded, one would not expect any further major shifts, although slight fluctuations are always likely as investors and businesses digest [the] news.
“The question many will be asking is when inflation will creep high enough for the BoE to change its path.”
Mr Goghlan is not the only expert who expects that inflation may force the BoE and other central banks to act.
Rachel Winter, an Associate Investment Director at Killik & Co, commented: “As expected, the Bank of England has left interest rates on hold for the time being.
“However, given the speed with which events have outstripped projections, and with some economists predicting inflation could peak around four percent and linger above target, the central bank will need to monitor prices very closely over the coming months.
“Inflation is currently being driven by a number of factors including rising oil prices, global supply chain issues and mismatches in the labour market that have caused wage growth, and a worsening of the situation may force the central bank to take action sooner rather than later.
“Savers are the losers in this low interest rate environment, with the value of cash being eroded by inflation.
“While keeping a rainy-day fund in the bank is highly recommended, those with high levels of cash could consider taking more risk and investing in the stock market in order to generate above-inflation returns.”
Rising inflation is not just pressuring the UK, with the economic powerhouses of America and China also seeing increased pressures.
On August 11, US inflation data was released and Jason Cozens, the Founder & CEO of Glint, examined the figures.
Mr Cozens said: “We’re in the midst of an economic climate where a month without a spike in inflation is almost cause for celebration. However, inflation was still higher than forecast suggesting that the Fed is yet to get a real grip on this escalating issue.
“Inflation is a global problem – in the UK, the Bank of England has admitted that four percent inflation is likely this year after its initial two percent target was surpassed months ago, whilst in China, producer price inflation is rising at an increasingly rapid pace, hitting nine percent last month. Could we see these costs piled onto the global consumer before long? If so, then consumers will be in for an even tougher few months.
“Raising interest rates would provide a boost to consumers but of course then Governments would have to worry about repaying the huge amounts of national borrowing and debt that has been collated. In the US, national debt is already at 108 percent of GDP, how can this be repaid if interest rates rise? It’s a vicious circle which punishes consumers and savers most of all.”
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