Martin Lewis says there is a ‘sliver of hope’ for savers
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Savers get little or no interest on deposit and rapid price growth will destroy the value of their cash in real terms if rates do not improve. Many will feel abandoned after the Bank’s policymakers continued to prioritise borrowers over savers.
Bank of England inertia will hit savers hard (Image: Getty)
In yesterday’s monthly meeting, the Bank of England warned the consumer price index is set to hit four percent this year, and remain above the Bank’s two percent target both in 2022 and 2023.
It forecast that inflation will stand at 3.3 percent next year, and 2.1 percent the year after.
Despite the sharp anticipated rise, policymakers will resist hiking base rates to avoid stifling the post-pandemic economic recovery.
Higher interest rates will push up borrowing costs for consumers and businesses, and increase the burden of servicing the country’s £2 trillion debt mountain.
Some will now question the point of saving (Image: Getty)
Savers will suffer because it will be impossible to find deposit accounts that will help their money keep pace with rising prices.
If Bank forecasts are correct, someone with £10,000 in a zero-interest account will see the value of their money fall to £9,100 in real terms in the next three years, losing them an incredible £900.
This is a disaster for savers who simply want a safe home for their money without the risk of investing in shares.
Many are older people who set money aside diligently throughout their working lives, only to be rewarded with more than 12 years of negligible rates following the Bank’s decision to slash base rates to 0.5 percent in March 2009.
More than a decade of low rates have hit savers hard (Image: Getty)
Britons now hold a mind-boggling £240 billion in accounts that pay no interest, and rates look unlikely to improve for years.
Laura Suter, head of personal finance at investment platform AJ Bell, said inflation is a “monster” that has been unleashed on savers. “With inflation currently at 2.5 percent, savers are already facing losses in real terms.”
This applies even if they lock their money away in a fixed-interest savings account for five years, she said.
Worse, there is no reprieve on the horizon, she said. “If interest rates remain stubbornly low and inflation soars to 4 percent as forecast, savers will pay a high price for the safety of cash.”
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Savers may have to take a chance on the stock market (Image: Getty)
Suter said the top easy-access cash account now pays a dismal 0.6 percent, which will force savers to consider riskier assets such as shares to get a higher return.
Jack Turner, senior investment manager at 7IM, said if savers hold too much of their financial reserves in cash, inflation will eat away at its spending power
At the same time, low interest rates are likely to fire up returns on riskier assets such as stocks and shares, and fuel higher property prices.
Turner said investors need to keep some money in cash for emergencies, but spread their long-term savings across other assets such as shares, bonds, and property. “A fully diversified multi-asset portfolio should protect the purchasing power of your money in the long term, while giving you the security you need.”