Analysts at the Economist Intelligence Unit (EIU) say worry about global markets and a weakening US economy will force the Bank of England to keep the UK interest rate at its record low of 0.5% until at least 2020.
Money markets had been predicting a rise in December this year or for the following month, but now imply the first increase will come in August 2019. They are even pricing in a 50/50 chance of a cut.
This shift comes after the recent stockmarket turbulence, falling oil prices, weaker UK economic growth and dovish comments from the Bank of England’s (BoE) February inflation report.
Investors now do not expect any of the G7 central banks to raise their interest rates this year, and anticipate there could be six cuts across the region. Although the US Federal Reserve had finally raised rates in December, it warned that the recent market volatility means US rates will stay lower for longer.
This is not the best news for retired expatriates. For many, their savings are their main form of retirement income and the extremely low interest rate of the past six or so years has done little to boost them. Banks and building societies have rushed to slash savings rates in recent weeks, and the latest figures from the BoE show that the average rates on fixed rate bonds and ISAs are at record lows.
Why is the interest rate staying so low?
Speaking in January, BoE governor Mark Carney said that with slowing UK growth and the weakened world economy, the Bank’s Monetary Policy Committee was in no rush to raise rates. A rise would “depend on economic prospects, not the calendar”, and unforeseen disturbances mean that the path for rates “cannot be ordained”.
This was reaffirmed when the Bank released its quarterly Inflation Report in February. Mr Carney said that global growth has slowed again in recent months, with the US growing less than expected; wage growth has been weaker than expected, and the falling commodity prices mean there is a risk of greater persistence of low inflation.
The UK economy is expected to grow by 2.2% this year and 2.4% next year, compared to November’s projections of 2.5% and 2.7% respectively.
However, Mr Carney also said that rates were “more likely than not” to go up over the next two years. A statement which analysts at the Economist Intelligence Unit say is at odds with the Inflation Report’s downbeat analysis.
One thing savers have had to learn the hard way over recent years is that interest rate expectations keep changing, and that too often a rise just seems to move further away.
Why bank accounts may not be best
How much of your savings do you keep in a bank account? If you have the long-term goal of maintaining your standard of living through retirement, then you need to maintain your buying power over the period – and it may be longer than you expect. You need to aim to earn real returns after inflation and taxation. That is very hard to do with interest and tax rates today.
Inflation has been low for a while now, which is good for your spending power. Low oil prices are likely to keep it suppressed for a while, but you need to look ahead to protect your savings from inflation, and we cannot predict now what inflation will be like in five, 10 or 15 years’ time.
Over the past 65 years, we have more commonly seen interest rates of about 3%. This rate would halve the value of your 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. Many people are therefore taking a risk by leaving their money in the bank, even though they think of it as a safe place.
While the media is full of doom and gloom at the moment, many believe the predictions of another financial crisis are exaggerated. For example, in a recent report, the economic think tank, the Centre for Economics and Business Research (CEBR), insists “there are still strong fundamental reasons to be positive about the global economy”.
The CEBR predicts it will grow 2.6% this year, the same as last year, adding that fears China is on the brink of collapse are unfounded, and that the recent slowdown in the US economy is just a “blip”. So now may be a good time to take action to protect your savings for future years with a considered and strategic investment plan.
As always, when considering your savings and investment options, you need to choose assets based around your personal circumstances, objectives, risk profile and time horizon. And remember, diversification helps lower risk, so make sure you have a suitable mix of assets. Seek professional advice.
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