IT’S not going to be much of an “Isa season” for cash savers this year. Or next year, or indeed for the foreseeable future. If that sounds negative, well, that’s quite apt.
Just days before we mark four years since the base rate hit 0.5 per cent, the deputy governor of the Bank of England raised the prospect of even lower rates.
Negative interest rates are now on the cards, according to Paul Tucker. While he conceded such a move would be “extraordinary”, he admitted the constraints were being looked at.
Those constraints won’t include the impact on savers.
A sizeable minority of borrowers would have cause to rejoice at a fresh rate cut, but for savers it would be yet another cruel blow.
It would be bad news for retirees too, as annuity rates would fall even further if banks respond to negative interest rates by purchasing even more gilts.
Nor would it help the housing market in the longer term. It would make life even harder for first-time buyers saving for the considerable deposits they need.
Tucker’s warning came just two weeks after Mervyn King, the (thankfully) outgoing Bank governor, warned that inflation is unlikely to fall back below its 2 per cent target until at least 2015.
That’s two more years of losses on savings, in real returns terms, given that not one normal account currently matches inflation, let alone beats it (although at least we’re not paying banks and building societies to look after our money, as we would if rates go below zero).
The combination of inflation and low interest rates has had a devastating impact on millions of pensioners, stuck on fixed incomes and relying on their hard-earned savings to scrape by.
There were signs of improvement last year, before the Bank – yes, again – launched the Funding for Lending Scheme (FLS). The FLS provides banks and building societies with access to cheaper funding in a bid to boost lending levels. Given cheaper money with which to finance mortgages, lenders don’t need to offer attractive savings rates to pull in more deposits.
The result has been entirely predictable: a rapid fall in savings returns.
Given they clearly don’t figure in the thinking behind monetary policy, there’s no reason to think the Bank will see the plight of savers as an argument against another rate cut.
Peer pressure on online lenders
THERE are some silver linings to all this, not least for peer-to-peer (P2P) lenders. These are the online firms allowing you to lend to other people and in return earn more than double the savings returns available on the high street.
While there are some concerns over these services, market leaders such as Ratesetter and Zopa have robust measures in place to address them and will come under Financial Conduct Authority regulation next year.
Dramatic expansion as savers finally desert high-street providers could pose the biggest threat to the P2P market as it attracts less scrupulous operators, however. Their initial emergence was followed by the launch of pretenders such as Quakle, the demise of which left customers out of pocket.
The P2P market is already growing steadily, but an explosion in popularity is the last thing it needs. It may well happen, though, because desperate savers increasingly have little choice but to look beyond their comfort zone.