Today sees or by the time you read this the announcement of another Bank of England policy decision. Actually reality has already changed as the vote took place yesterday in one of Governor Mark Carney’s “improvements”. He preferred the PR spin of presenting the announcement and the minutes together against the real and present danger of some traders being more equal than others. Presumably just like the apocryphal civil servant Sir Humphrey Appleby he feels that those with the knowledge are “one of us” and can be trusted with it. Of course in that episode of Yes Prime Minister Sir Humphrey was shocked by the defections to Russia and we know that central banks leak “like a sieve” as Jim Hacker put it.
That may particularly matter today if it turns out that someone has voted for a Bank Rate cut or other form of policy easing. We are in a zone now where with production and manufacturing looking rather recessionary and the latest Markit Purchasing Managers Index suggesting a quarterly economic growth rate of 0.1% one or two will be mulling that. Perhaps the fact that the NIESR suggested a quarterly growth rate of 0.3% yesterday will make them hold fire for now but it brings me to the point at issue today which is to look at a major implication of the Bank Rate being at an “emergency” rate of 0.5% since March 2009.
Even the BBC has noted that there has been changes in this area. This is because even worse than flatlining like the 0.5% Bank Rate they have been consistently falling.
Interest rates for savers have fallen to new record lows, after hundreds of cuts in recent months and more than 1,000 in the past year.
Savings rates plummeted after the Bank of England slashed its base rate in the financial crisis. Since last autumn, as the economic outlook has worsened, they have fallen again……In research carried out for the BBC, the rate-checking firm Savings Champion recorded 1,440 savings rate cuts last year and more than 230 so far this year.
So “The heat is on” to quote the late and sorely missed Glen Frey. Indeed it is the much trumpted ISAs which have been leading the charge in the wrong direction.
Tax-free Isa rates are at their lowest ever. The average variable rate Isa is down to 1%, while a typical fixed-rate Isa pays 1.4%.
Savers amongst you may well be having a wry smile thinking that we have been allowed to put more into ISAs like that just as they have become less valuable! That does remind me of the plans of Sir Humphrey Appleby in Yes Prime Minister.
Along the way the BBC has uncovered a real nugget but sadly it mostly misses the significance of it.
The average return from the five best easy access accounts has dropped from more than 3% in 2012 to under 1.3%.
This is because the Funding for (Mortgage) Lending Scheme began in the summer of 2012 and the £69 billion or so of cheap funding provided by the Bank of England pushed mortgage rates lower. As it did so this meant that the banks had less need for ordinary deposits meaning less competition and lower deposit or savings rates have followed over time. More recently that existing trend has been added to by the way that interest-rates have fallen elsewhere such as the -0.4% deposit rate of the European Central Bank or the way that bond yields in Germany are negative out to the 9 year maturity. An illustration of this is the way that the 2 year UK Gilt (government bond) only yields some 0.36% which of course is below the Bank Rate which is not only embarassing for the Forward Guidance of Mark Carney it provides little help and succour for savers.
This is defined by the Financial Times lexicon as shown below and the emphasis is mine.
Financial repression is a term used to describe measures sometimes used by governments to boost their coffers and/or reduce debt. These measures include the deliberate attempt to hold down interest rates to below inflation, representing a tax on savers and a transfer of benefits from lenders to borrowers.
Back in September 2010 a right Charlie told us this as Mr.Bean took to the Channel 4 airwaves.
“What we’re trying to do by our policy is encourage more spending. Ideally we’d like to see that in the form of more business spending, but part of the mechanism … is having more household spending, so in the short-term we want to see households not saving more but spending more’.
As you can see discouraging saving and financial repression was at the top of Charlie’s agenda. Indeed he went on to give some Forward Guidance that is as hapless as the more recent versions.
“It’s very much swings and roundabouts. At the current juncture, savers might be suffering as a result of bank rate being at low levels, but there will be times in the future — as there have been times in the past — when they will be doing very well.
So far he was completely wrong or of course he was singling along to the lyrics of Pete Townsend.
I can see for miles and miles and miles and miles and miles
Savers may be thinking of another line from that song for Charlie’s benefit.
I know you’ve deceived me, now here’s a surprise
As the car crash interview continued the Deputy Governor had more to say on the subject.
Savers shouldn’t see themselves as being uniquely hit by this. A lot of people are suffering during this downturn.
Perhaps he thought he was suffering by getting by on a salary of £252,947 per year. Also there is not much sign of Charlie suffering in a pension worth a minimum of £4.85 million ( I have ignore spouse benefits etc for simplicity). Also he gets thrown some extra treats every now and then like his Review of UK Economic Statistics. So it would appear that a man who might be considered “one of us” by the establishment is immune from the suffering his and their policies have inflicted on others.
There are quite a few themes at play today. Firstly the driving force behind this is the central banking effort to boost asset prices such as house prices and equities. Lowering market interest-rates gives them a double whammy as the explicit move of lowering mortgage rates is added to by the implicit one of lower savings returns leading to less saving. Actually as ever life is much more complex than in the central banking 101 play book as for example many choose to pay their mortgage down faster by such methods as overpayments and repayments in 2016 have averaged just under £18 billion per month so far in 2016. Others adjust to lower savings rates by saving even more.
There is also the issue of timing as savers were promised a brighter future by Charlie Bean. Yet rather than being brighter the storm clouds have gathered and the situation has got worse.
If we spread our net wider we see that in an interview with Bild last month Mario Draghi of the ECB was humming the same song.
People can influence how much they get on their savings even in times of low interest rates. They don’t just have to keep the money in savings accounts but can invest in other ways.
But there are alternatives when investing savings. In the United States savers had to face seven years of zero interest rates.
Rather oddly the possibility of the UK leaving the European Union has been presented as a possible olive branch for savers by the new Bank of England policy maker Michael Saunders. From the Daily Telegraph.
The Bank of England will need to raise its key interest rate or Bank Rate to 3.5pc by the end of next year if Britain votes to leave the EU, the newest recruit to the Monetary Policy Committee has warned privately.
As this might well encourage savers to vote out Mr.Saunders may well be aping Bart Simpson right now as he stands in front of the Bank of England blackboard writing ” I must not…” a thousand times