This month marks an anniversary that will be celebrated by some and cursed by others – five years of the Bank of England’s official base rate being 0.5%. Three months into the year the consensus seems to be that rates will remain unchanged for the rest of 2014, with the rate possibly rising in early 2015.
For savers this has meant five years of below inflation returns where they have seen the spending power of their money eroded considerably. Accounts paying interest above the rate of inflation are almost non-existent, certainly without tying your money up for many years.
In most cases borrowers “have never had it so good”. Those on long term tracker mortgages have benefited hugely and even those who are on the lender’s Standard Variable Rate (SVR) have usually done quite well, whilst those with enough equity in their property can get fixed rates for less than 4%. Unsecured borrowing like personal loans, which has traditionally been far more expensive, can be obtained with a rate of less than 6% if you’ve got a reasonable credit history. Add to this the fact that inflation erodes the real value of debt as well as savings means borrowers have done very well out of the situation.
The majority of investors have also had a good time with the FTSE 100 up around 80% over the same period and the less volatile average ‘mixed’ fund up over 45%.
The problem with such a long periods of “stability” is that people get into the habit of thinking it will continue forever. Many borrowers have got used to low interest payments, increased their spending and may now struggle if rates were to rise even a little. After a long period of positive returns investors often forget that “investment can fall as well as rise”. All this can lead to complacency setting in and investors, savers, borrowers and even in some instances their advisers, taking their eyes of the ball. Even if the official interest rate hasn’t changed the financial world is a very different place to what it was five years ago and the need for continual reviews remains.