Bank Base Rate – the highs and lows of 5 years of a record low

Bank Base Rate – the highs and lows of 5 years of a record low

The Bank of Englands Monetary Policy Committee has announced that the base rate will remain at its present level of 0.5%,  five years after the record low level was first introduced.
Depending on your own personal situation, this could be good news or bad news:

  • it is likely to be regarded as bad news for savers and those who don’t have a mortgage. This demographic of people have been hammered over the last 5 years and many have been forced out of a deposit based savings environment where their capital balance could not fall into one where they could lose some or all of their money in the hope of receiving a higher return overall.
  •  it will be regarded as good news for borrowers; especially those with variable rate mortgages who have no protection against rising rates. After 5 years these borrowers could be forgiven for thinking that rates will never go up and effectively tailoring their lives around a low interest rate environment.

Christopher Malkin, one of the principals and advisers at BLM,commented that whilst interest rates remained at these levels those dependent on income from their savings were being forced to make some difficult decisions about the way in which they structure their investments and that a  good proportion of people may be taking more risk than they would otherwise be prepared to accept in order to try and make ends meet. Investment risk comes in many forms but the current situation underlines the basic principle that an investment strategy should be based around a good risk assessment.

He also commented that the value of the money that people hold in Bank and Building Society savings accounts is being eroded through the insidious effects of inflation, which is generally higher than deposit account rates.

For those with a mix of a mortgage and savings, the situation is more likely to be neutral however, for those with larger mortgages or mortgages that are presently costing the maximum they can afford to pay each month, the latest ‘hold’ on rates is likely to be good news. Stephen Sale, principal and adviser at BLM, commented that borrowers should be careful not to count on interest rates remaining at these levels for much longer. Many economists are expecting rates to remain static through 2014 but begin to rise in 2015 with some predicting a rise from 0.5% to 1% through 2015 and then rising to 2% through 2016.

For those with savings such rises will be welcome but for borrowers who have very little extra in their budget to pay an increased cost, the situation may look more bleak and they should perhaps consider their options.

6th March 2014

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