Are you feeling subject to financial repression? You should be because it’s the phrase used to describe how the Government reduces it’s debts by lowering interest rates to a level that is negative in real terms. Anyone saving in a bank account or building society is having their savings eroded this way because they are not getting a real return. Bank base rate has been at the historically exceptional rate of 0.5% for some time and high street banks are as a result offering trivial rates of interest (certainly much less than the 2.7% and rising change in the Retail Price Index reported last month).
But the Governor of the Bank of England, Mark Carney, has indicated that interest rates are likely to remain low for some time. Indeed he is ditching the previous guidance that rates would rise once unemployment had fallen to a given level, because it has already fallen below the previously set target when it was not expected to do so until 2016. In the meantime, the Bank thinks the recovery is still too patchy to raise interest rates. There are still too many part-time workers who cannot find the full-time work they would prefer, i.e. there is spare capacity in the workforce, the Bank alleges. Although economic growth is improving, the expectation therefore is for a benign pressure on inflation.
Of course, this low interest rate environment does not just affect small savers in banks and building societies, it also affects stock market investors because the interest rates paid by stockbrokers on cash held with them is now minimal – indeed for many brokers it is now zero.
An example of low bank interest rates is that of Barclays. I commented yesterday on how the bank seems to be run in the interests of bankers rather than shareholders. It is certainly not run in the interest of depositors. So for example, it pays 0.7% gross on an “Everyday Saver” account, i.e. one with “instant access” and no penalties for withdrawal. That’s on a sum of £85,000 which is the maximum guaranteed for deposits under the Financial Services Compensation Scheme.
There is one tactic you can take if you don’t like that rate and wish to avoid the worse aspects of financial repression. Just move your savings to the Co-Operative Bank (formerly the Britannia Building Society part). They pay 1.5% gross on the same £85,000, with deposits guaranteed by the Government likewise in their Select Saver account. The only restriction is that you can’t make more than four withdrawals per year.
Now you may have read about the troubles of the Co-Operative Bank. But that should not worry depositors as the Government is standing behind deposits of up to £85,000 and the restructuring of their debt should see them through. But their troubles have put off other savers so the Co-Op probably needs to offer a higher interest rate. It’s rather like saving with Northern Rock after they ran into difficulties – a highly profitable exercise.
Unfortunately you will still be getting a negative real interest rate after tax. The only way to get a real return is probably to invest in real assets such as property, corporate bonds or shares in businesses. But as regards the latter punting on the stock market at this time might be risky whereas you need to be selective about bonds as when interest rates do rise then capital values will fall.
So it really depends on your time horizon, but cash is certainly no longer king in the pockets of investors. And it is surely regrettable though that the Government, with the support of the Bank of England, wishes to continue to run an economic policy that damages those who have few options for where to place their cash savings.
Roger Lawson
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