IF THE conflicting interests of borrowers and savers were a metaphorical football match over the six years since the financial crash then the score would now be Borrowers 5, Savers 0.
As financial Armageddon beckoned and recession took hold, the Bank of England slashed interest rates from 5.75 per cent to historic lows of 0.5 per cent between December 2007 and March 2009 to avoid another 1930s-style depression.
Rates have remained anchored there since and, as expected, the minutes of the Bank’s monetary policy committee (MPC) meeting in November show they are likely to stay there for some time yet.
The Bank, now under the stewardship of Mark Carney, the former head of the Canadian central bank, says the UK is in a sustained economic recovery and faces no big inflation risks. As a result, all nine members of the MPC voted this month to again leave rates on hold.
Hawks at the Bank are becoming an endangered species in the uniform white dove-world that is Threadneedle Street.
In the wider world, it is good news for borrowers, from mortgages to unsecured loans and small business debt. But it bad news for pensioners and other people living on their capital as UK banks pay niggardly rates on accounts in credit.
Many deposit accounts are currently paying 0.5 per cent or less, while interest on cash ISAs frequently only accrue about 1.5 per cent.
Therefore, a chronic divide has taken hold between how differently consumers in debt and those with savings view this scenario.
Six years of loose monetary policy cannot be seen as either a short, sharp shock for savers or transient relief for borrowers. Rather, particularly for younger people with shorter memories, the low-rate backcloth must feel almost systemic, part of the economic furniture.
That will eventually change, but not soon. The Bank again repeated in the MPC minutes that, even when unemployment falls to Carney’s target of 7 per cent, it won’t automatically trigger a rate rise, just reflection; on hoped-for better returns on savings, it still looks too early to raise our sights.
Whitehall and the City threw darts in the dark
THAT’s rich. The broking arm of one of the investment banks that advised the UK government on the recent flotation of Royal Mail has placed a “sell” recommendation on its shares.
Amid the euphoria of the shares since the sell-off, UBS now suggests the animal spirits of investors have slipped the leash and become too optimistic about future profit margins at the business as industry competition sharpens. The stock has rocketed as much as 80 per cent since the listing. This unexpected development from UBS – together with evidence to MPs on the business, innovation & skills committee yesterday from investment banks that gave ministers theoretical valuations on the value of Royal Mail – suggest Whitehall and the City may have been throwing darts in the dark on the matter.
The likes of Citigroup, Deutsche Bank, JP Morgan and Panmure Gordon said they had advised the UK government that the postal business could be worth between £3.7 billion and £8.5bn. That compared with a valuation on float of £3.3bn.
That was some spread of prices. But it is significant that not one of those investment banks offering valuations came up with a figure below Whitehall’s price.