Base rate at record lows in the UK

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Base rate at record lows in the UK

The Bank of England has cut the Base Rate by 0.25% to a record low of 0.25%. The Monetary Policy Committee (MPC) voted unanimously to cut the interest rate whilst the committee said to expect a further rate cut to near zero by the end of the year. This cut represents the first move in interest rates in seven years.

As interest rates are now very close to zero, it was likely to have been difficult for some banks and building societies to reduce their own rates much further, which in turn might limit their ability to cut their lending rates.

In order to mitigate this, the MPC is launching a Term Funding Scheme (TFS) that will provide funding for banks at interest rates close to Bank Rate.  This monetary policy action should help reinforce the transmission of the reduction in Bank Rate to the real economy to ensure that households and firms benefit from the MPC’s actions.

In addition to the rate cut, the committee announced other measures including the purchase of £60bn of UK government bonds and up to £10bn of corporate bonds, although both these decisions were not unanimous.

One of the other headlines from the accompanying Inflation Report was the announcement of the biggest cut to its growth forecasts since it started making them in 1992. The key cut was the reduction in its growth prediction for 2017 from the 2.3% it was expecting in May to 0.8%.

It is too early to identify the medium-term impact of these measures on both the UK economy and markets, although the immediate reaction was a further weakening of sterling, a rise in the UK FTSE 100 equity index and fall in bond yields.

What does the interest rate cut mean for you?

The cut was not unexpected but it does seem to confirm that the period of ultra low rates is likely to continue for longer than had been anticipated. Investors who hold significant cash holdings with banks and building societies will have to endure negligible returns for the foreseeable future – and you may have already received notification from your bank or building society of a further cut in savings rates following this rate cut.

Having cash available to meet short-term financial planning and to meet rainy day needs can be an important part of financial planning – but the low returns on savings accounts can make holding cash investments unsuitable over the longer term.

Whilst cash investments provide easy access to funds and security from the potential of falling investment values, inflation will erode the true value of an investment:

After 5 Years
After 10 Years
After 15 Years
After 20 Years
2.5% Inflation


Alternatively an investment of £100,000 would need to be worth £128,000 in 10 years time for it to be worth £100,000 in real terms.

What alternatives are available?

We have seen average Cash ISA rates fall significantly over the last 5 years from over 2% to below 1% today.

If you are willing to accept some additional investment risk, you may want to consider transferring Cash ISAs either in full or in part to Stocks & Shares ISAs.

There are many other investment options, including retirement planning, Inheritance Tax planning which may get your money to work harder for you and to suit your own circumstances and risk profile, helping you to achieve your financial goals.

Your Origen Consultant can help to guide you through the options available and help to find the best way for you to invest in the current financial climate.

Alternatively you can call our Client Liaison Team on 0344 209 3925 if you are looking to put your cash to work.

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[ Date Posted: 11/08/2016 11:15:32 ]