The global trend for low interest rates is showing no signs of fizzling out. In March, when decision-makers at the Bank of England (BoE) unanimously agreed to keep the interest rate at 0.5%, it marked seven years of record low rates. Unsurprisingly there was no change again at the April meeting.
Only a few months ago it was widely believed that the rate would have gone up by now. BoE governor Mark Carney had signalled small increases this year to gradually bring the interest rate up to 1.7% by 2018.
Now, for many economists the earliest they see an upswing is November, with some predicting the next increase could be as far off as 2020. The forecast from the Treasury watchdog, the Office for Budget Responsibility (OBR), is that we will have to wait three years for the rate to rise to 0.75% and by 2021 it will only have reached 1.1%.
So should we be bracing ourselves for another year of low rates? According to the OBR, we should prepare for longer … and lower. They estimate that the rate will go down before it goes up and will stay decreased “for some of the next two years”.
Carney has confirmed he would consider cutting the rate further to revive the weak British economy. However, he has – for now, at least – ruled out going into negative territory, as has happened in countries like Sweden, Denmark, Japan and Switzerland. In a situation where rates fall below zero, savers are essentially paying a bank or financial institution for the privilege of holding their money.
Why the moving goalposts?
The OBR say that the outlook for rates in the UK has changed “significantly” in recent months. Volatile stock markets, tumbling oil prices and weaknesses throughout the global economy (especially China) presented a landscape where interest rates had little room to move.
UK growth is also weaker than expected; in the last few months the International Monetary Fund (IMF) has downgraded growth for 2016 from 2.2% to 1.9%. And, although the UK has recovered from a spell of deflation last September, it has only achieved 0.5% inflation – quite a way off the 2% target. The likelihood is that inflation will have to reach 1% before the BoE considers increasing the interest rate.
The added uncertainty of the EU referendum vote in June has not helped. It is widely believed that in a Brexit situation, one outcome could be decreasing interest rates further to offset a likely devaluation of the pound. A Reuters poll found that 17 of 26 economists agree that this would be the case.
In this climate, central banks around the world have kept – and expect to keep – rates at historic lows. Global interest rates are so close to zero that the current low growth, low inflation and low interest rate environment may last a lot longer.
What does this mean for savers?
Persistent low interest rates are not good news for savers. This is especially true for many British expatriates who rely on their savings for their retirement income.
Many people worry about the risks of moving money out of the bank and investing it for capital growth, but forget that there are also risks with leaving money in the bank. Besides the possibility of institutional failure, the spending power of your money is eroded by inflation over the longer term. Worse still, if rates do fall below zero, you could end up paying the bank to hold your money for you.
There are ways to manage risk, for example by using ‘pound cost averaging’ (or ‘Euro cost averaging’) to spread out your investments over time. Using this strategy you would invest, say, a third of your money on one date, another third two months later and the rest two months after that. Because you have not invested all at once, you are not unduly exposed to the risk of the market falling on a particular day and can benefit from an average return based on several different snapshots of the market.
How much of your investible capital you hold in cash should depend on your personal circumstances, aims, risk tolerance and time horizon – and not on speculation of what interest rates may or may not do. However, with no compelling signs of a rise in interest rates any time soon, this could be a good opportunity to reconsider your options. A professional adviser can help you establish the savings and investment strategy that suits you best.
Your adviser should start by taking an objective analysis of your risk appetite, and then build a diversified portfolio to specifically suit your personalised risk profile, objectives and circumstances.
By Gavin Scott
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Gavin Scott, Senior Partner of Blevins Franks, has been advising expatriates on all aspects of their financial planning for more than 20 years. He has represented Blevins Franks in the Algarve since 2000. Gavin holds the Diploma for Financial Advisers. | www.blevinsfranks.com
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