For you and me, interest rates are already negative

By Jason Mountford, regulated financial planner at Irwin Mitchell

There’s been quite a bit of coverage in recent days about the Bank of England (BoE) considering moving interest rates negative. Before we all get too excited about the bank’s paying us to hold a mortgage with them, this potential plan isn’t as much of a departure from the norm as you might expect.

The key thing to remember with this issue is that in a lot of ways, the BoE is like the bank for other banks. When we talk about interest rates set by the BoE, what we are really referring to is the base rate. This is what the BoE will pay in interest to banks that hold money with it.

So if Lloyds or Halifax have a spare few billion lying around, they might hold it with the BoE in order to get a small amount of interest. If interest rates are low, this encourages banks to get out and lend, because the 2% from your mortgage is better than the 0.50% they get by leaving it with the BoE. If the base rate goes negative, this just incentivises the banks to get out and lend, rather than parking their money.

For savers, a negative base rate means even less, because rates have been negative in real terms for a long time.

One of the most important numbers to consider when looking for appropriate investments or savings options is the rate of inflation. This usually refers to either the Consumer Price Index (CPI) or the Retail Prices Index (RPI). These are calculated in slightly different ways and RPI tends to be the more favoured approach at the moment.

The reason why this is so important is because it is the rate at which our everyday costs are going up each year, and therefore the minimum amount our savings and investments need to grow by, in order to retain their purchasing power.

As an example, in 1988 the average new car cost £12,207. If you’d walked into a lot (or maybe done a virtual tour via Zoom) today, you’d need £27,219 to buy that same car. Unless your money is growing by at least this rate, you are slowly losing purchasing power each year.

In real terms, we’ve been losing money on our savings for a long time. RPI has dropped off significantly since the beginning of lockdowns here in the UK, but it is still running at 1.60%. Back in January this year, it was at 2.70%.

I’m not sure about you, but I don’t see too many banks offering 2%+ on savings accounts. In fact, according to a study from 2019, the average saver in the UK is losing almost £500 each year in real terms from their savings accounts!

So what does this mean for you? I think it just highlights the importance of knowing your financial objectives and having a really solid financial plan. For short-term expenditure or an emergency fund, cash will always be king. As much as it’s not a great way to grow long-term wealth, you can always rely on the fact that whatever you put in the account will stay there (as long as it’s below the £85,000 FSCS limit).

If, on the other hand, you’ve been using banks accounts as a way to save for retirement or grow your wealth over the long term, it’s probably time to reconsider your options. For long-term wealth creation, you need to be investing in ways which allow you to grow your portfolio at least level with, but ideally in excess of, inflation. This comes with more risk, but as long as it’s managed correctly and you’ve got a long enough time frame, it’s something to really think about.

If you’d like to have an initial discussion around your financial objectives and whether you should be considering investments are part of your financial plan, please do get in touch.

The information given and opinions expressed are subject to change and should not be interpreted as investment advice. All data is sourced by IM Asset Management Limited unless otherwise stated. All financial and wealth management services are provided by IM Asset Management Limited which is regulated by the Financial Conduct Authority (FCA), FCA Firm Reference Number 402770.

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