The incredible shrinking pound and your savings

It is now widely predicted that the Bank of England will raise the base rate sooner rather than later. Inflation is on the increase and the base rate can’t remain this low for ever, can it?

When Japan reduced its base rate to 0.5% in 1995 nobody expected it to remain at that level or under for the next 16 years, but there it is today at under 0.1%. I’m not saying that our economy is heading the way of Japan’s, just pointing out that the unexpected can and does happen. After all, how many people truly foresaw the banking crisis?

Inflation and the base rate have led us all on a merry dance over the years. In 1980 the base rate reached 17% and inflation peaked at 21%. During July and August 1982 the base rate was being adjusted twice a week in an attempt to meet the economic demands of the moment. In 1990 the base rate rose to 14.88% while inflation stayed below it at 10.9%. The current situation of a base rate being 4.6% below RPI is extreme, but by no means unprecedented. … Continue Reading

If the Bank of England won’t support savers, then the Government must!

We have moved from an era where the ethos of saving was destroyed in the pursuit of economic growth, to one where the rewards for saving are being destroyed in the fight against economic decline.

By financing our economic boom through borrowing, we were in fact paying a premium to the finance industry for the pleasure of instant gratification. The “instant gratification” was mutual; we got what we wanted now, without having to save up, and the finance industry made a profit.

The more we borrowed the more successful they were. So in order to maintain this success they made it easier and more tempting for us to borrow. In any case saving just didn’t seem to fit in the multi-media, online, instant access web-enabled world of the new millennia. … Continue Reading

Are savers being hung out to dry?

What was it that Donald Rumsfeld said? “We know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns the ones we don’t know we don’t know.”

In the recent press conference for the release of the Bank of England’s Quarterly Inflation report, Mervyn King showed a close empathy with Mr Rumsfeld. He very clearly explained what facts that he and the Monetary Policy Committee (MPC) did know and what they didn’t know, as well as what they couldn’t possibly know. The point of this was to stress the uncertainty of factors that the MPC must weigh up in coming to their decision. … Continue Reading

Is the Government its own biggest creditor?

In June the Office for Budget Responsibility forecast that the Government’s interest payments on its debts would be a whopping £43.3Billion this financial year.

Part of this interest is payable to the Bank of England, who created £200 Billion through quantitative easing (QE) and used it to buy government gilts.

Analysts at Société Générale have calculated that if the Bank of England issues a further £50 Billion of QE as is expected and uses it to buy more Government Gilts, the Government could end up paying the Bank of England £7.75 Billion in interest this year. Money that will, of course, eventually be returned to the Treasury.

Shouldn’t it be the Government’s duty to protect the value of its citizens’ savings?

Several months ago I attended an event where Steve Webb, the Minister for Pensions, opened by saying:

“The worse advocates of pensions and savings are retired people who say to their children and grandchildren: ‘I wish I’d never saved. My neighbours got this and that, while I saved and got none of it’.

“There is such a lot of resentment. And the resentment where people who made the effort to save don’t get rewarded is huge. They are the sales force for not saving. We need to tackle that and make sure that people who have savings make themselves better off.”

It was a short speech that went on to talk about auto-enrolment into pension schemes, raising the basic state pension to a level above the benefit threshold, creating a competitive open market for annuities and the necessity to increase retirement age to make state pensions affordable.

Much of this is potentially good news; ensuring people have adequate savings and income to cover their retirement is a win, win, win situation. The first win, because our home grown savings provide an important stable source of capital for the economy; the second, because you will be more comfortably off and financially secure in your retirement and the third because having a retired population who have money to spend is much better for the economy and society than one that doesn’t. … Continue Reading

Dear Saver, If you can spend do, but if you are suffering we are sorry but its for the best

We know that after Charlie Bean’s admission on the Channel 4 news that it was the direct intention of the Bank of England’s policy to get savers to spend by reducing interest rates, upset a great many people. Some of whom took the trouble of writing to the Bank of England to vent their anger and disagreement with the policy.

Below is the reply that one of our supporters received and attached is a strikingly similar one sent to another.

If you would like to view a short clip from the interview and judge for yourself whether Charlie Bean’s comments were taken out of context as suggested in the letter please click here.

Dear …….

Thank you for your e-mail of 28 September to the Governor and Mr Bean, regarding the recent comments by the Deputy Governor, Charlie Bean, during an interview on Channel 4 News. This has now been passed to me for reply.

The Deputy Governor was asked by Channel 4 to explain the impact on savers of the monetary policy measures taken by the Bank of England in response to the sharp contraction of the economy in the wake of the financial crisis.  I am sorry that you feel that Mr Bean’s remarks were provocative and insensitive.  I can assure you that this was not his intention. I should also add that many of the reports of what the Deputy Governor has said have been misleading or incomplete and, of course, his responses were not broadcast in their entirety. Let me explain.

… Continue Reading

Bank of England admits that its policy is to penalise savers

In an interview for Channel 4 news Charlie Bean, the Deputy Governor of the Bank of England, has made it clear that the Bank’s policy is that people should spend, not save and that the Bank has no intention to act to encourage saving maybe for as long as the next decade.

However he admits in the interview that preceding the financial crisis the UK was not saving enough. According to Mr Bean the Bank of England had been saying for years that more saving was needed in order to rebalance the economy. It is certainly true, in the years preceding September 2008 the UK savings ratio averaged 3.2%, by far its lowest levels since the 1950’s.  But it begs the question: why did they not act to encourage saving rather than wait until it was too late? The answer is probably because the Bank of England is not responsible for managing the level of saving in the economy and as far as I know there is no government target in place for the savings ratio and it is not actively managed at all. … Continue Reading

Bank of England’s Mr Bean lets cat out of the bag

Channel 4 news at 7pm tonight (27th Sept) will include an interview with Charlie Bean, the deputy Governor, of the Bank of England.

In the interview Mr Bean shows the Bank of England’s true attitude towards savers and makes it quite clear thet the current economic policy is designed to disincentivise saving, he also said “I would certainly not expect the level of bank rate to stay very close to zero for a decade or more.”

Below is a short clip from the interview

A couple of quotes from the interview…

Faisal Islam “Deputy Governor do you accept that one of the side effects of your policy over the last two years is that savers have been hit really badly?”

Charlie Bean “Well I wouldn’t want to call it a side effect I think it is important to realise that actually it is a key way that monetary policy affects the economy by affecting the incentive to save. When we cut bank rate it reduces the incentive to save it gets households to spend more it also encourages businesses to go out and invest more. So when we need to pump more demand into the economy what we do is lower the bank rate when we need to cool the economy we do the opposite so I emphasise it is not really that it’s a side effect.”

Faisal Islam “It does seems a little contradictory when we hear so much about rebalancing the economy towards a high saving high investment economy away from the go-go years of too much borrowing that the incentive save has never been poorer” … Continue Reading

30 Billion reasons for savers to fight back

Interest rates have been at rock bottom for savers since March 2009. They started to fall shortly after the Lehman Brothers crash in September 2008. Six months later the Base Rate had been brought down in stages to 0.5%. Savings rates had followed it down to a level on a par with the ones shown below for July 2010.

At the end of July 2010 there was £1.082 trillion of cash savings deposited in the UK. A trillion is a difficult number to grasp, so to put it another way that is £1,082,222 million (yes, a million million) of cash deposits.

… Continue Reading

Is it self-interest that stops the Government ensuring savers receive fair returns?

At the recent press conference for the publication of the Bank of England’s Quarterly Inflation report, Mervyn King, the Governor, defended the recent lending record of banks – fewer loans at increased rates – by referring to the high costs banks were facing in obtaining funds.

This statement might raise a few eyebrows amongst UK savers, who have over £1 trillion deposited with banks and building societies. They are a major source of the funds that are lent out, but are currently receiving the lowest interest rates they can remember.

Banks raise the money they lend out from two main sources: either retail deposits, which are our savings, or the wholesale funding markets, ie from other financial institutions, companies, councils etc. Up until recently the cost of borrowing these wholesale funds has been more expensive compared to pre-crisis levels and also compared to retail deposits, perhaps explaining Mr King’s assertion. … Continue Reading