DCSIMG

Low interest rates will help to shape election

The Bank of England in London. Picture: Getty

The Bank of England in London. Picture: Getty

  • by JEFF SALWAY
 

FEW could have imagined when the Bank of England cut the base rate to 0.5 per cent in March 2009 that five years later it would remain unchanged.

The implications are far-reaching, and not only in the most apparent ways. The impact on savers has been brutal, especially retirees that rely heavily on the income from their cash savings to supplement their meagre pensions.

Up to £326 billion has been lost to inflation and low interest rates since March 2009, reckons campaign group Save our Savers.

Borrowers have fared better of course, benefiting from low mortgage rates, but even that may have a sinister twist when interest rates rise again. Five years of cheap mortgages can be habit-forming, particularly when the government has failed to apply the lessons of the last credit-driven recovery. The eventual increase in base rates will be very painful.

It’s not difficult to see how long-term low base rates are shaping politics too. The absence of interest on cash deposits has exacerbated the effect on households of rising living costs, falling real wages and the UK government’s ideology-driven attack on welfare.

The combination of inflation and low savings rates has for many people wiped out the cash fund that was keeping their household finances together. Don’t forget that the working poor account for a large proportion of the rapidly growing number of people who rely on food banks to feed their families.

These are the households that may previously have raided a savings piggy bank, now empty after five years in which rainy-day funds have been wiped out by inflation.

This is the backdrop to elections over the next 14 months that could change the face of the UK forever. In Scotland, Alex Salmond isn’t shy of holding up food banks as irrefutable evidence that we’re governed by a Westminster elite with a callous disregard for the victims of its policies.

What the coalition has inflicted on vulnerable and struggling households over the past few years is sickening and a tragedy. Of that there is no doubt.

Yet Salmond talks a language that David Cameron understands when he pledges to cut corporation tax but refuses to commit to a 50 per cent income tax. And last week, after years of propagating the deficit myth to justify austerity, Cameron changed tack, suggesting further public spending cuts could instead be used to fund tax cuts.

He wants to provide a “bit of extra cash” and “help a dad afford those trainers for his son or help a mum celebrate her daughter’s birthday with a meal out”. Don’t bank against Cameron having the brass neck to use food banks as a way to somehow justify “cost of living” tax cuts.

With elections now around the corner, it’s a sign of what’s to come. Tax cuts will always buy votes, as will rising house prices. Low interest rates have been a gift to George Osborne, who is praying they stay where they are until at least May 2015.

The majority have lost out to low interest rates and the long-term consequences will be dire. But that, and the housing bubble that he’s inflating, is a small price to pay for Osborne, who sees rising house prices as the biggest vote-winner of all.

 

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