The Bank of England’s August monetary policy meeting was a disappointing one for savers, signalling that the first interest rate move would not come until around May next year. The recent events in China also make it more likely that there will be no increase this year.
The meeting on August 6 was the first time that the minutes were published alongside the interest rate announcement. The Bank of England’s (BoE) Inflation Report was also released that day.
The previous month, Governor Mark Carney had suggested that the situation would start to change at the turn of the year. Before the meeting, analysts expected some dissent among the nine-member Monetary Policy Committee (MPC), with up to three members expected to vote to increase the base rate. However, on the day only one did.
The UK interest rate was therefore left at 0.5% for the 78th month. Quantitative easing was also maintained at £375 billion.
Factors taken into account included lower oil prices, the strength of the pound and a weaker than expected job market.
The Bank’s assessment suggested that interest rates would follow market expectations, which are for a 0.25% rise in May, a second 0.25% later in 2016, followed by two in 2017 to reach 1.7% by 2018.
On the positive side, the Inflation Report is more optimistic on growth than the previous one in May. Gross domestic product (GDP) for 2015 is now expected to be 2.8%, compared to the 2.5% forecast in May.
In May wages were expected to grow at 2.5%, a figure which has now been revised up to 3%. Productivity is expected to grow by 1%, compared to the 0.25% expected in May.
At the Bank’s press conference, Mr Carney said that the likely timing of the first rate increase “is drawing closer”, but the exact timing cannot be predicted since it will be the product of economic developments and prospects.
When deciding when to raise rates, the key components the bank will look at are wage growth, productivity, core inflation, import prices and risks to the international environment.
He advised: “The path of rates is much more important than the precise timing of the first increase. Given the likely persistence of the headwinds facing the economy the MPC expects Bank Rate increases, when they come, to be gradual, and to be limited to a level below past averages.”
Since then there have been the developments in China, with fears about the slowing Chinese economy and what impact it could have internationally unsettling the markets.
On August 25, China’s central bank cut its key lending rate by 0.25% to 4.6% to calm stockmarkets, the fifth cut by the People’s Bank of China. Lower interest rates will make it cheaper for banks to borrow from the central bank and so easier for businesses and individuals to borrow money. The reserves banks are required to hold were also reduced, so there is more money available for lending.
The aim is to shore up long-term economic growth. The government hopes to convince investors that although the economy is slowing down, it will not have a hard landing.
Some analysts speculated this could delay the UK interest rate rise even further, even till 2017. It is however too early to know how the situation will progress, and the base rate could well remain on track for a 2016 rise.
There is a similar situation in the US, with analysts previously predicting a rate hike by the Federal Reserve Bank (Fed) this September. We now need to see how the Fed will react and if the hike is postponed following the Chinese policy intervention that rattled global markets.
Earlier in August, Mr Carney had commented that there will always be some unpredicted global headwinds, “but that’s not a justification for permanent stasis”.
The situation in China does however make a rise this year more unlikely. Another key reason is UK consumer price inflation, which has fallen rapidly, something Mr Carney described as the “most striking event in the UK in the past year”.
Inflation is also low in Europe, and there is a risk people could become too complacent about this threat to their wealth.
Over the last 65 years inflation rates of around 3% have been more common. This rate would halve the value of capital within 24 years. If your savings have only half the spending power in your later years of retirement, this could have significant implications for your standard of living or the wealth you wish to pass on to the next generations.
Do not wait until you feel the effects of inflation; that would be too late. You need to take action now to protect your savings for future years. Seek personalised advice on strategies to beat inflation, appropriate for your objectives and risk profile.
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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