Savers in the UK were dealt a blow yesterday, and investment ISA providing stock brokers a boost, as the Bank of England appeared to pull back from its earlier position on regular interest rate rises to be expected over the course of 2018. A 0.25% rate rise was announced yesterday, bringing the base interest rate set by Britain’s central bank to 0.5%. Financial markets had been absolutely certain about yesterday’s hike, the first since 2007. The Bank had also recently said that markets had been ‘underestimating’ how quickly future rises would come.
However, during yesterday’s press conference to announce the current hike, Bank of England Governor Mark Carney struck a far more cautious note, saying that future increases to interest rates should be expected to come at a “gradual pace and to a limited extent”. On the back of earlier comments on how the pace of impending rises was being underestimated, markets had already started to price in multiple rises in 2018, the first expected around March.
Yesterday’s change of tone by Carney has now dampened those expectations anew and led to the pound suffering its biggest one-day loss against the euro in more than a year. After initially surging on news of the rise to 0.5%, the pound subsequently lost almost 2 cents against the euro over the next three minutes on what followed. The Bank of England has now said that the expected extent of future interest rate increases should be that they will be “very gradual” and constitute another 2 to 3 0.25% increases to bring the base rate to 1% by 2020.
Cash savers had also been expecting a boost after several years of rock bottom interest rates have meant that the real value of money held in savings accounts has been eroded when taking inflation into account. With inflation also recently having hit its highest level in 5 years to 3%, and the Bank of England warning it will likely rise some more before peaking, holding cash is less attractive than ever despite yesterday’s 0.25% hike.
The previous financial year already saw the amount of new money being saved in cash ISAs drop by around £20 billion, with part of that money being diverted into stocks and shares ISAs, which reached record highs over the same period. It now seems likely that trend will continue over the current tax year. While investing in stocks, shares, bonds and funds is seen as riskier than holding cash, investors who put their money into conservative funds and shares still stand a good chance of returns beating inflation. Cash savings, on the other hand, are currently guaranteed to see their purchasing power fall.
Now that hopes for steady interest rate rises over the next year or two have been quashed, stock brokers offering stocks and shares ISAs will now be expecting to tempt even more cash ISA savers into a rethink.