Despite expectations that interest rates may be cut, the Bank of England confirmed today that the base rate would remain at 0.75%.
Poor retail sales figures over Christmas, ongoing Brexit uncertainty and a drop in inflation had increased speculation that the Bank would cut rates by 0.25% to 0.5%.
However, in Mark Carney’s final interest rate meeting as governor, the Monetary Policy Committee voted 7 to 2 to keep rates unchanged.
The recent stabilisation of economic indicators, a slightly better housing market and modestly greater consumer confidence were enough to persuade rate-setters to leave the base rate at 0.75%, despite the weakening in growth at the end of last year, disappointing pay figures and falling inflation.
Inflation, a key measure used by the Bank to determine the base rate, dropped from 1.5% in November to 1.3% in December, well below the Bank’s target of 2%, as Christmas shoppers bought less food and goods over the crucial festive period.
Interest rates are traditionally used as a tool to control inflation. If inflation starts to accelerate rapidly, a rise in interest rates can dampen consumer spending as households have less spare cash to spend at the end of the month.
Conversely a drop in rates, can act like a tax cut to the UK’s millions of borrowers and encourages consumer spending. This is especially true for those on variable rate mortgages, as they see the cost of servicing this debt reduce.
Despite the gloomy retail sales, business sentiment in the UK has picked up since the election causing the Bank to believe an immediate cut is unnecessary.
But that doesn’t mean it will be plain sailing for the UK, which leaves the European Union tomorrow with eleven months of tough negotiations ahead to secure a trade deal with the EU.
If the outlook for growth looks more subdued, the Bank said it would be ready to cut rates. “Policy may need to reinforce the expected recovery in UK GDP growth, should the more positive signals from recent indicators of global and domestic activity not be sustained or should indicators of domestic prices remain relatively weak” it said.
New governor Andrew Bailey will not find it any easier than his predecessor to normalise policy from here.
So for now, borrowers who may have been hoping for a cut today can at least take comfort from the fact that inflation appears to be under control and not a threat over the short term to cause rates to rise. Of course, while cash-stretched borrowers might want future a rate cut, the current ‘lower for longer’ interest rates continues to be bad news for the millions of savers who, since the financial crisis, have had to adapt to record low rates on their savings.
With the average dividend yield on the FTSE 100 currently at 4.3%, many investors are increasingly looking towards riskier investments, such as stocks and shares, as an alternative to cash, in order to get a regular income.
If this higher-risk, but potentially higher-reward approach makes you feel nervous, you may prefer to put your savings in the hands of the experts, by investing in a managed fund. Fidelity’s Select 50 offers a number of funds that invest in UK shares with the aim of providing an income and the potential for capital growth. These include the Franklin UK Equity Income Fund and JO Hambro UK Equity Income Fund.
Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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