Carney’s opening gambit is bad news for savers

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THE outlook for savers, retirees and first-time buyers looks bleak after the new head of the Bank of England dashed hopes of a rise in interest rates, experts have warned.

Mark Carney, who took over from Sir Mervyn King as governor earlier this week, signalled that interest rates would remain low for some time to come.

In “forward guidance” issued following Carney’s first monetary policy committee meeting, the Bank said “the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy”, suggesting that a rate rise is at least two years away.

The statement quashed the hopes of savers who have seen the rates on cash accounts sink to new lows over the past few months. The average cash individual savings account (Isa) now pays just 1.44 per cent, according to Moneyfacts, down from 2.5 per cent when the funding for lending scheme (FLS) launched last August. By giving banks access to cheaper funding, the FLS has reduced their dependence on savings deposits, with the result that savings rates have been falling since late last year.

Charlotte Nelson, spokeswoman for Moneyfacts, said: “With the base rate expected to continue to remain at a record low, it is only going to lengthen savers’ pain.”

Those approaching retirement suffered a blow too as Carney hinted at further quantitative easing (QE). The money printing policy has hit retirees hard by driving down gilt yields, on which annuity rates are largely based.

A recent rise in gilt yields had raised expectations of an improvement in annuity rates after a series of cuts sent the retirement income generated from pension savings to record lows.

Annuity rates have fallen by almost 30 per cent since QE began in 2009, Axa Life Europe has estimated, a plunge that has cost retirees thousands of pounds in pension income.

Adrian Lowcock, senior investment manager at Hargreaves Lansdown, said: “On the whole this statement is not good news of savers or pensioners. We look set for several more years of low interest rates which means low rates on cash savings and low rates on annuities as gilt rates fall and are also likely to remain low.”

But while further QE is bad news for retirees taking out annuities, according to Sandy Robertson of Acumen Financial Planning, there are options open to those approaching retirement,

“You could phase into retirement and buy a series of annuities over a number of years or, if you have a reasonably-sized fund, you could leave your pension invested and draw an income from it,” said Robertson, managing director of the 
Edinburgh firm.

“Times have been tough for savers and pensioners for a while, and they can’t really get much worse, but as always specialist advice should make sure they’re making the most of their assets.”

However Carney’s opening gambit is better news for homeowners, with low interest rates keeping mortgage repayments down and supporting house 

Ray Boulger, senior technical manager at mortgage adviser John Charcol, said the Bank’s statement would take the pressure off the swap rates on which fixed-rate mortgage pricing is based. While fixed-rate mortgages are unlikely to fall any further, the fall in swap rates will deter lenders from hiking mortgage costs, said Boulger.

He also predicted that house prices would rise more rapidly over the coming months, building on modest growth in the first half of 2013.

“In most parts of the UK, activity in the housing market is more likely to be constrained by lack of stock than by lack of buyers,” said Boulger.

“As the upward price trend continues, combined with low mortgage rates and improving availability at higher loan-to-value, anyone who has been holding off buying a property waiting for house prices and/or mortgage rates to fall further is likely to take the view that they are more likely to lose out by waiting than by acting.”

UK house prices will rise by up to 8 per cent in 2013, according to Boulger, with further increases next year. The amended forecast raises fresh doubts over the need for the government’s controversial help-to-buy scheme, added Boulger, whose comments came as Registers of Scotland revealed that house prices in Scotland have risen by more than 50 per cent over the past decade.