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Interest rate cut backs savers and investors into a corner

By KentOnline reporter


After much speculation, the Bank of England cut UK interest rates for the first time since March 2009 last month, from 0.5% to a record low 0.25%.

Governor Mark Carney said his reason for doing so was an “economic outlook that has changed markedly”.

Brexit, a faltering Europe, a weakening Chinese and global economy and a more fragile outlook for the UK have all been cited as contributory factors.

UK interest rates have been historically low since March 2009
UK interest rates have been historically low since March 2009

What’s more, there may be more to come, with 0% rates remaining a strong possibility.

So, why cut interest rates? The aim is to stimulate the economy by encouraging spending.

As you no longer have an incentive to save, you are more likely to spend your money instead.

Commercially, it also makes lending cheaper for businesses, which encourages growth.

Bank of England governor Mark Carney
Bank of England governor Mark Carney

Countries such as Japan and Switzerland have been running a negative interest rate policy for some time; although whether this has had the desired effect is arguable.

So, whilst this may be good news for those in debt or with interest-only mortgages, it means the options for saver and investors are becoming extremely limited.

Bank accounts, savings accounts, bonds and ISAs are not offering the decent returns they once did. The average savings account now pays less than 1% interest, which means that £10,000 savings earns less than £100 per year.

Low interest rates are also having an effect on pensions. A large chunk of your pension will be made up of bonds and lower rates means lower pay-outs from this sort of instrument, creating a pensions shortfall.

Can negative interest rates yield positive growth?
Can negative interest rates yield positive growth?

The result is that private investors are being forced to make riskier investment decisions to get a better return on their money.

However, access to many of the higher risk products, such as property, classic cars or art is restricted by the level of wealth you need to start investing. Also, getting your money back out can be a slow process.

For this reason, many investors are now investing and trading in financial markets, as it provides one of the most accessible and viable options for those looking for a decent return.

Compare some of the 2016 financial market returns with your bank account and you’ll see why.

There have been large movements in the values of stocks, which have attracted investors
There have been large movements in the values of stocks, which have attracted investors

A word of caution though. With the pressure to get returns better than nothing, you may be tempted to try going it alone in the high risk investment world, with limited knowledge.

Trading the financial markets involves a certain level of complexity and skill. These products are high risk for a reason.

Yes, they can offer a very realistic alternative to today’s saving problems but without receiving the correct advice, training or education, it could spell financial disaster.

With low interest rates likely to continue for the foreseeable future, you would be wise to ensure you are well educated and informed.

Those of you who are more risk averse may find that your best investment is a mattress with enough space under it to store your hard earned cash.

To learn more about financial markets, visit the website of Canterbury-based THE STOP HUNTER, at thestophunter.co.uk.

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