In a highly anticipated move, last week the Bank of England (BoE) cut the base rate by a quarter of a per cent to 0.25%. Prompted by the outcome of the EU Referendum, the latest monthly meeting of the BoE’s Monetary Policy Committee resulted in the decision to make the rate cut – the first since 2009.
Here we look at the impact the rate cut will have and the long term prospects for savers and investors.
Depending on your position, last week’s announcement will likely have been met by one of two reactions – despair if you’re a saver with a large amount of cash reserves or perhaps a glimmer of hope if you have a large mortgage to pay or are looking to invest further in property over the coming months.
The rate cut was highly anticipated; in fact some commentators had predicted that the cut would come last month, immediately after the referendum result. What is clear from the BoE’s decision is that an environment of low interest rates is here to stay for at least the mid-term, and potentially for the long term. Some analysts are predicting that rates will fall further over the coming months and could remain at or close to zero, or perhaps even into the unchartered territory of negative base level rates, for the rest of the decade.
It is expected that the rate cut will filter through to banks and we will start to see a reduction in interest rates on savings accounts. This is particularly bad news for those savers with the majority of their investable funds in cash. Even prior to the base rate cut the average interest rate for ISA savers was below 1%, representing a poor potential return in anyone’s book, but particularly if you rely on income from savings.
It is for this reason that some financial analysts are predicting an increase in the number of savers moving their funds away from the low interest rate environment of the banks into the world of stocks and shares – an area that some savers have traditionally been wary of.
Stock market returns have vastly outweighed interest rates in recent times and the base rate cut signals the continuation of this position. Although the worlds’ stock markets can fluctuate off the back of political, business and economic news, it is still possible to achieve around 3% – 4% per annum of income from investment funds in the UK. In addition to the income (which is variable and not guaranteed) you also have the potential for capital growth from the investment value itself, although this can also go up and down.
If entering into the markets for the first time, we advise investors to consider diversifying their asset allocation across a variety of different low correlated asset classes and geographical regions to help reduce the overall level of risk. The right blend of assets means that over time, the peaks and troughs of their performance should balance out and effectively smooth the investment returns over the longer term.
One of the main reasons savers avoid stocks and shares investments is the risk to their capital. The value of the investment can fluctuate on a daily basis and is not guaranteed. For this reason alone, those investors with a particularly risk averse attitude might be better placed to leave their savings in other ‘less risky’ environments, such as cash based deposits.
However, the record low level of interest rates, along with the potential for charges being levied on balances held in bank accounts, which has recently been mooted, is understandably leading to a renewed interest in alternative financial planning strategies. Any change to the way you invest your money needs to be viewed alongside your wider financial circumstances as there are numerous factors that might affect the suitability of one investment vehicle over another.
For a review of your current financial planning strategy or to speak to us about putting a revised plan in place in light of the interest rate cut, please contact us.
Gresham Wealth Management is a chartered firm of independent financial advisers. The value of investments can fall as well as rise and you may not get back what you invest.