Life gets worse and worse for savers and depositors

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.

Savings Rates

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.

And again.

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.

Financial Repression

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




Whatever happened to yield and the investors and savers who relied on it?

Today I wish to look at a concept of investing and indeed saving which has seen quite a few changes in the credit crunch era. This has been brought to my mind by this piece of news this morning from the Financial Times about Lloyds Banking Group.

In a boost to investors, the bank revealed a full-year dividend payment of 2.25p per share, up from 0.75p per share last time, amounting to a total payout of £1.6bn. It also unveiled a special dividend payment of 0.5p, amounting to £400m.

This yield boost as seen the share price rise some 5 pence to 68 pence and at such a level it represents a yield of 4% for this year and 3.3% after that. Of course looking forwards using a dividend to calculate a yield has the issue that it is by no means guaranteed. Indeed one might be wondering already if Lloyds can afford it going forwards with numbers like these.

Pre-tax profits fell to £1.6bn for 2015, from £1.8bn the previous year, dragged down by the PPI provision in the fourth quarter.

A lot of it depends on whether you believe that the new extra Payments Protection Insurance write-downs are sufficient as this has been a road where we have heard from the bank Europe many times.

It’s the final countdown
The final countdown

There are also the issues of the banking sector itself which has had a troubled 2016 already. It was only on Tuesday when I discussed HSBC which may struggle to maintain its dividend and Standard Chartered which axed its final dividend payment. This of course follows on from Royal Bank of Scotland which announced yet more problems a few weeks ago. Still someone seems able to plan for his own higher dividend.

However, António Horta-Osório,Lloyds chief executive, has received a 6 per cent salary increase this year taking it to £1,125,000, in his first pay rise since joining the bank in 2011. He is to be granted a deferred bonus of 723,977 shares, which was worth £450,314 at Wednesday’s closing price of 62.2p.

The Guardian are more bullish on his pay deal claiming it is £8.5 million but they do not break it down.

If we look back I recall that many of the bank shares were considered to be “dividend” stocks and that Lloyds yielded 7% for a while. Of course that then hit trouble as share prices collapsed and dividends were axed. More recently one might have considered oil companies to be providers of a safe dividend which remains us we need to be very careful about the concept of a safe haven.

However let me move on by quoting the UK FTSE 100 dividend yield which was 4.09% at the end of January according to the London Stock Exchange.

What about savers?

Back in September of  2010 Bank of England Deputy Governor Charlie Bean.told us this on Channel 4 News.

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.

The current Bank of England data series starts just after then in January 2011 when it records the ordinary deposit savings rate as 1.3% as opposed to the January 2016 rate of 0.47%. So savers may ask Mr.Bean or rather Professor Sir Charles Bean how good his Forward Guidance was? Also how long they will be expected to do this?

Savers shouldn’t necessarily expect to be able to live just off their income in times when interest rates are low. It may make sense for them to eat into their capital a bit.

The Bank of England has stopped publicising the value of senior executive pension pots – I wonder why! – so let me do the maths and point out that the 2014 annual accounts imply a value of £4.5 million for our knighted professor. Accordingly it will be quite some time or more likely never that he has to eat into his own capital a bit.

In the counterfactual world of Mr.Bean everyone is better off as QE saved the economy and prevented their savings being eaten by the dragon Smaug from the Hobbit or such like.

What about bond yields?

It was only yesterday that I pointed out the issue of the fast disappearing bond yield in the UK.

The heat is on here as the UK ten-year Gilt yield has fallen to 1.37% this morning…….. The five-year yield has dipped to 0.71% which if maintained will lead to cheaper fixed-rate mortgages.

So there is little yield to be found there and whilst it ebbs and flows the trend appears to still be downwards. There was a time that people would laugh at forecasts of the ten-year US Treasury Note yield going below 1% but its drop after a rise in official short-term rates has quieted that. Especially if we note that Germany has one of 0.16% and Japan has seen its dip into negative territory again. Indeed the German bond yield universe has this problem according to @fwred.

Frankfurt, we got a problem. New record high 45% of Bund universe trading below ECB’s depo rate, not QE eligible.

That’s below -0.3% as opposed to 0%. Of course this leads to trouble elsewhere as investors look to markets which do at least have a positive yield.


These have particular trouble as longer dated bond yields are used and they have plunged in yield as described above. If we look for the impact then according to Sharing Pensions pre credit crunch a basic ( no indexation in fact no add-ons) would have provided a yield of 7.9% for a 65-year-old and now provides 5.6% which is quite a cut. Frankly if Gilt yields remain where they are then we can expect further falls. A reason why they have not fallen further is that annuity providers have invested elsewhere but this too comes with problems. This lead Legal & General to announce this earlier this month.

Of our LGR annuity bond portfolio 0.7% (£266m) is in sub-investment grade Oil & Gas and 0.1% (£38m) in sub-investment grade Basic Resources.

I do not want to scare monger as L&G can cover that but it does at least beg a question of where the race for yield is going?

The whole concept of long-term saving hits all sorts of problems with low and negative yields. Places which use present value calculations will watch it head towards infinity or perhaps more accurately become undefined. It was only Monday that I pointed out a consequence in Japan.

The Bank of Japan’s negative interest rate decision has started affecting the life insurance market, with sales of some products such as whole-life insurance policies being suspended following the announcement.

Buy To Let

For foreign readers this is the UK term for buying a property and renting it out. This provides quite a “yield” these days although much of what is considered a yield is in fact a capital gain or asset price rise. From Your Move.

Taking into account both rental income and capital growth, the average landlord in England and Wales has seen total returns of 12.0% over the twelve months to January…..In absolute terms this means that the average landlord in England and Wales has seen a return of £21,988 over the last twelve months, before any deductions such as property maintenance and mortgage payments.

The gross rental yield is estimated at 4.9%.


What we have seen in the credit crunch era is a reduction in the interest-rate or yield on what were traditional savings products which were considered to be relatively safe. First we saw official interest-rate cuts hitting deposit savings rates in a trend which continues although 0% has been something of a Rubicon in many places so far anyway. Then we saw QE style pressures push bond yields and long-term interest-rates lower as failure in one area did not lead to a rethink but an Agent Smith style “More…..More” instead. Along the way we see that products such as whole of life insurance and annuities have been hit hard.

Such financial repression pushes investors and savers into riskier investments such as equities and in the UK in particular property both to own and rent out. The catch is in the riskier bit especially as policy after policy emerges to boost house prices which means for new buyers the risk continues to rise. The situation gets more highly charged.

You may wonder why I have left the concept of a real yield to the end but it has been deliberate as you see it is so misunderstood and has been so volatile I am not sure that we know what it means going forwards. Let me give you an example from the UK Debt Management Office from this week.

The United Kingdom Debt Management Office (DMO) announces that the syndicated offering of £2.75 billion nominal of 0⅛% Index-linked Treasury Gilt 2065 has been priced at £163.728 per £100 nominal, equating to a real gross redemption yield of -0.8905%.

So if inflation shoots up the UK taxpayer cannot lose? Oh hang on…….

Oh and those who believe that the Consumer Price Index is a more accurate guide to inflation than the Retail Price Index have just given up a gap that is currently of the order of 1% per annum.