Friday, 22 July 2016

Almost zero interest rates and people are still saving

In a recent article written by Amelia Murray and Richard Dyson they suggest that “interest rates won’t rise until 2020”. This seems to be a grim outlook on the savings environment. As mentioned in the text: 

“The Bank of England surprised investors by holding Bank Rate steady at 0.5pc on Thursday. But for savers this offered little compensation: rates have been falling fast all year and continue to do so”.

The Brexit vote became a reality on June 23 of this year, a month after, we are seeing different scenarios that predict the future of the British economy. Since only one month has passed there is quite a lot of speculation in the economic playing field. However, there is evidence explaining the reasons behind the shock effect on the savings rates. As outlined in the article:

“Before the financial crisis Bank Rate was a reliable trendsetter for mortgage and savings rates. But since 2009 – when the rate was lowered to 0.5pc and where it has remained unchanged ever since – other factors have driven the returns earned on cash and the interest charged to borrowers. While Bank Rate has stayed level, savers’ average rates have fallen by 84pc since 2009. Average two-year mortgage rates are down by 74pc”.

The decrease trend in savers rates is evident and there has been rates cut without relying on the Bank Rate. Consequently, the trend has shown that individuals are more likely to save more money thus reducing their levels of consumption. In fact, “households have reined in their spending and saved more, so banks do not need to entice them with attractive deals.” The effects of the shock are pretty standard supply and demand based; consumers are spending less money and striving to save more. Thus, there is no need for banks to provide good deals to acquire clients. 

Evidently, this hurts savers and causes levels of uncertainty about how they should act. The doubts that exist, naturally, are based on seeing what methods can provide the best returns on the savings accounts, if they are saving more but are not being benefited by their savings then they might resort to other options. This is clearly illustrated by Murray and Dyson, when they use the example of a medical device engineer that has split his money into multiple accounts to see how he could be benefited and is even contemplating P2P. Murray and Dyson mention:

“P2P has attracted many savers looking for better returns than current savings rates. However, there are risks involved. P2P is not covered by the Financial Services Compensation Scheme which means your cash is at risk.”

Alternatives are being researched for individuals with concerns of how they can get the best bang for their buck, yet at times they find themselves in dark spots with no type of support. One of the most important factors in determining what is the best option for individual savers is information. Depending on the desire of the saver, options vary. Just Service HK strives to fill in the disconnect for those who find themselves at a financial crossroads. For more information, do not hesitate to contact us.

Source: Telegraph

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