For all the resilience the UK economy has shown, there is no doubt that this year's ISA season is set against a backdrop of uncertainty. Whatever the pros and cons, Brexit, and a lack of clarity on what our future economic relationship with the EU will look like, has left us at a crossroads.
BOE rates: Hope for savers at last?
If the past nine months have taught us anything, it’s that currency can be a particularly volatile economic metric. There were dramatic downward shifts in the value of the pound following the Brexit vote, while the now-notorious flash crash that followed in October also left its mark. Things have stabilised since, but there was a sudden flurry last-week Thursday in the wake of the Monetary Policy Committee’s (MPC) monthly meeting to determine Bank of England rates.
Indeed, it marked the first split since July, when eight members voted to maintain base rates at 0.5 per cent, while the other, Gertjan Vlieghe, put his hand up to cut them by 0.25 per cent. Vlieghe’s wish was granted the following month anyway, as rates were slashed to new record lows. In fact, there was even talk of a United Kingdom living under negative interest rates at one point.
Yet last Thursday, the renegade vote in the 8-1 split went the other way, with Kristin Forbes voting to follow a similar path to the Federal Reserve by raising rates back up to 0.5 per cent. The pound soared in response – seemingly for the first time in ages – and plenty of excitement ensued at the prospect of a rate rise in the not-too-distant future.
So, will it happen? And when?
The bad news for those willing on an increase to base rates is that Ms Forbes is actually an external MPC member, who will be departing the round table at the end of June. Also, with the political climate as it is, and the invoking of Article 50 of the Lisbon Treaty now just days away (not to mention the spectre of another Scottish independence referendum), it would come as a surprise to see the generally risk-averse central bank voting in favour of a first increase since July 2007 in the immediate future.
But it has reopened an interesting debate too. Many people questioned whether Mark Carney and his team had jumped the gun by lowering rates last August, as the economy has held up more robustly than experts had anticipated subsequent to the Brexit vote.
The intensification of quantitative easing was great news for those seeking loans, paying for goods and services on credit, or with variable-rate mortgages, as borrowing became considerably cheaper. Yet the purpose of the rate cut was primarily thought to be to ward off a recession, and growth figures since June, not to mention increasingly positive forecasts for 2017, have made a mockery of this.
Carney recently intimated that this better-than-expected economic performance was in fact a direct product of his looser monetary policy. But, for beleaguered savers, such a claim for plaudits on his part will have appeared dubious.
An inflationary backdrop
The key economic indicator which has changed the landscape is rising inflation. Figures released this week confirmed that the BOE’s 2 per cent target has now been breached (2.3 per cent last month, an increase of 0.5 per cent from January), with the headline rate forecast to close in on 3 per cent by the end of 2017.
Grisly news for savers trying to earn real returns on their money. Yet, it hasn’t gone unnoticed within the ranks of the MPC, with a number of members indicating last Thursday that they would follow Forbes’ lead at future meetings if inflation were to spiral.
The rise in inflation has, of course, been largely due to the 13 per cent drop in the trade-weighted value of the sterling since June, while the denouement of the long-time supermarket price war has also begun to put upward pressure on consumer prices. But an increase in base rates as part of a tighter monetary policy should help to curb inflation (by virtue of strengthening the currency and preventing an overheating of the economy via excessive credit expenditure), thus, in theory, giving savers the double benefit of better headline returns, coupled with lower inflation.
But, notwithstanding the BOE’s independence, politics will inevitably play its role in carving out the backdrop against which policy decisions are made. All we can safely say is that, should base rates shift upwards in the next few months, it will be good news for two reasons. Firstly, long-suffering savers and pensioners will finally get the respite they’ve long been crying out for. And secondly, it will be a resounding testament to the health and prospects for our wider economy.
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