How do low interest rates affect your financial planning?

Over three and a half years of a 0.5% base rate have created distortions in the investment markets previously unseen outside of Japan. This makes expert ongoing advice all the more important.

A central banks conspiracy?
In September, most of the world’s major central banks rose from their summer slumbers and joined in a round of concerted action. The youngest of them, the European Central Bank (ECB), announced that it would buy the bonds of governments that requested assistance ‘without limit’. This fulfilled an earlier promise from the ECB’s head, Mario Draghi, that the ECB would do ‘whatever it takes’ to save the euro. The move pushed down interest rates on the government bonds of those countries most likely to seek help, notably Spain.

The US Federal Reserve (the ‘Fed’) was next to show its hand, launching a third round of quantitative easing (QE – also widely called ‘money-printing’) at the rate of $40bn a month. The Fed said that this would continue until it concluded that there had been a substantial improvement in the labour market, although it did not define exactly what ‘substantial’ meant. As if to reinforce the idea that there would be many months of $40bn purchases, the Fed’s Chief, Ben Bernanke, said that short-term rates would probably have to remain between 0% and 0.25% until ‘at least …mid 2015’.

The final member of the party was the Bank of Japan (BoJ), which announced that its QE programme would increase by ¥10trn (about £80bn) to a grand total of ¥55trn. Japanese official short-term rates have been 0.5% or less since 1995.

The Old Lady says nothing… for now
The one major central bank that produced no new initiatives was the Bank of England. It started a third round of QE in July, which involved £50bn of gilt purchases, now coming to end. Most pundits expect that a further round will start immediately the £50bn is exhausted, even though by then the Bank will have bought 40% of all the available non-index-linked gilts.

0.5% ad nauseam
The Bank of England has held base rate to 0.5% since March 2009 and current money market rates suggest that there is unlikely to be any move up before 2015 – much in line with the USA. Indeed, there was a feeling that the Bank could cut rates further – to 0.25% – but the Governor, Mervyn King, has poured cold water on such an idea.

Nevertheless, retail deposit rates have been dropping. Whereas in June it was possible to find instant access internet accounts paying 3.2% gross (albeit thanks to a one year bonus), the best available today is 2.8% and there are only a handful of accounts offering more than 2.5%. Similarly, fixed rate deals have become less appealing. You will now struggle to find a bank with a recognisable name paying 3% gross for a one year fixed term deposit. Once you have accounted for tax that return will not keep pace with current RPI inflation, unless you are a 10% taxpayer.

Financial repression and income opportunities
The central banks’ common stance of holding down interest rates to abnormally low levels has been described as ‘financial repression’. The aim is to stimulate economic growth by keeping down private sector (and government) borrowing costs; and encouraging those with cash to invest in shares and bonds rather than leave their money on deposit.

If you feel one of the repressed and need income from your capital, then there are plenty of opportunities outside the banks and building societies. However, in nearly every case you will have to accept some risk to your capital in return for what can be a substantial improvement in income.

Check what any money on deposit is earning. All too often the rates on old accounts are derisory – your ‘gold’ account may be paying only 0.05%. If you then decide that you want to move your money to improve your income, before taking any action please talk to us.

If you have any questions about financial planning and the impact of low interest rates on your investment portfolio, please call us on 020 3865 2379


Becoming a client

See our free no-obligation
4 steps to becoming a client
and our transparent fees

Click Here »
Read Our Blog Blog
The Latest From Tower Hill
Tower Hill In The News Investment Videos
Industry Expert Analysis
Contact Tower Hill Associates Contact us
Talk to us today
VouchedFor rating and reviews for John Lang, IFA Richmond

Watch our latest video
for more about us and our service.

Latest Blog

  • How to make your pension pot last? November 24, 2015 It is a question that will be on many people’s minds as they approach retirement particularly with greater pension freedoms giving increased flexibility on how to use their pension savings.

Links / Search