Hmmm, I have been mulling over an interesting article on thisismoney.co.uk which puts forward a convincing, plausible figure of £58bn as the amount of interest lost to savers during the last 22 months of daylight robbery. £58bn being the difference between 0.5% and 3.41% (the average over the previous 22 months) but not accounting for any deterioration due to inflation!
It could also be viewed as a £58bn contribution to banking profits that the industry has not had to lift a finger for but I am sure that this will be excluded from profits when justifying bonuses, won't it?
With the article also suggesting that savers outnumber borrowers seven to one and that with 2/3rds of Britain's 11m house buyers on standard rates it seems to be a minority who are benefiting (other than the Banks of course).
There is an ongoing debate re. borrowers v. savers and what might happen should rates rise, but it is highly probable (if not quite a certainty), that anyone on a standard variable rate took on their mortgage at rates higher than today (or at least once initial discounts had expired) so they must retain a margin of affordability should rates rise. In addition, how many of these SVR's are for buy to lets?
Further, if there is a risk that these borrowers are close to the wire in terms of affording their loans, why is the BoE persevering with its "spend, spend, spend" statements?
I become more and more convinced that the BoE, along with our last Government, got it completely wrong by gambling "everything" on the single bet of rescuing the banks (wistfully hoping for a change in their ethics to subsequently kick start the economy) and in continuing to artificially depress interest rates (thereby learning nothing from the outcome of the last decade of artificially low interest rates).
The only conclusion that I can come to is that the BoE is not particularly concerned with either savers or borrowers, it is only concerned at recapitalising the banks by spoon feeding them money!
The last Government and the BoE rightly identified the need to stimulate the economy by injecting funds back into the money supply to bridge the interruption caused by the credit crunch, but should have at least hedged their bets by also creating jobs through public works, NHS or public services, if they wanted to maintain income tax revenues and consumer spending. In this way the banks (still benefiting from partial re-capitalising), would have had to retain some normality with their traditional business models of offering interest rates closer aligned to inflation to raise funds and then lending/investing these funds, and managing risks, to generate profits. In this way the banks would have had little choice but to distribute monies into the economy and have to work harder to manage the consequential impact to profits and bonuses (so no real downside then).
The psychology behind the BoE's immoral demands on savers (voiced by MPC deputy Charles Bean) to spend the UK back into recovery seems perverse given that their use of interest rates is only benefiting a minority of borrowers whilst robbing savers amid very few signs that bank lending to businesses has been restored.
I would put forward the view that many savers, particularly the so called "silver" savers, have lived prudently within their means and taken the responsibility to support themselves rather than burden the welfare state but must now feel abandoned by those who claim to know better (but still fell asleep on watch), due to the loss of income from, and dual pronged attack on, their hard earned savings from essentials spending and inflation.
Has anyone considered the potential future cost to the state that this could lead to if savings and resulting income continue to be eroded. The loss of capital now is potentially devastating to many who may have little opportunity to ever recover the situation (unlike someone younger and in employment).
I am also of the opinion that, taking SVR's out of the equation, not many individuals or businesses are benefiting from the 0.5% rate, except for the banks, of course, who are adding disproportionate margins and charges to loans, credit cards and overdrafts.The Government and BoE expect a return on the money they have lent to the banks, why can't we?
Ensuring that interest rates were more closely aligned to the reality of inflation would probably have been enough of a boost to savers to give them a feeling of security as to the sustainability of their incomes which in turn would have allowed them to maintain their normal spending levels (in fact I can think of 58bn more reasons than they currently have). But, the BoE has the opposite view of this ie. that high interest rates only encourage more saving.
I am open to correction but I am sure that I have read more than one article or report in the last 12 months suggesting that the practice of saving and paying down debt is increasing as opposed to there being any increase in consumer spending?
The additional benefit of this closer link to inflation would have been the opportunity to take a more measured view and response to potential inflation as a stronger sterling would also act as inertia to any short term increases on imports.
There is an obvious risk to exporters but I still think that there is a balance between inflation on imports (raw materials, fuel etc) and any supposed competitive advantage that a weak pound gives them. It also needs to be considered that many of our largest companies also have international presence so have much more opportunity to use local currencies to manage exchange rate impacts.
I would put forward the suggestion that if there was a better reflection of the "real world" in interest rates and the resulting strength of sterling (absorbing some raw material inflation) then the biggest risks to any company's ability to flex costs would be wage inflation and taxes (neither of which ever seems to have a strong link to interest rate policy).
Finally, I would ask, as I would any organisation " What is the stated intent of the MPC?".
Googling this I found the following "The MPC sets an interest rate it judges will enable the inflation target to be met"........"Each member of the Committee has a vote to set interest rates at the level they believe is consistent with meeting the inflation target."
And, what is the inflation target you ask, well... "The inflation target of 2% is expressed in terms of an annual rate of inflation based on the Consumer Prices Index (CPI)".
Like many of you I also have a view on the backward move to CPI which I will probably comment upon at some stage (but thanks for that one too Gordon!).
Where did I find these statements? On the Bank of England site and its pages on the Monetary Policy Committee and the Monetary Policy Framework.
Well I am sorry but, if that is still the priority then the MPC is failing and continue to do so by artificially depressing interest rates.
Although (to be fair and balanced), the Monetary Policy Framework does expand to include the "Government’s economic objectives including those for growth and employment". Sounds good but are we seeing low interest rates and Quantitative Easing capping wage inflation and increasing employment?
The MPC needs to be more accountable and transparent about its intentions, and actions, along with detailing who will benefit and who will be bearing the brunt of the recovery for the short, medium and long terms. It is essential to capture hearts and minds!
I recognise the urgent, undeniable need for a policy to sustain recovery but also that there should be some justifiable fairness and openness in the execution.
Unfortunately, as it stands I for one feel hoodwinked, beaten up, and robbed by the BoE! (And that is before I even begin on the hypocritical conflict between BoE: spend, spend, spend and Government austerity measures!)
thisismoney.co.uk link to "Savers lose out on £60bn in interest"
Link to Bank of England: MPC Page
Link to Bank of England: Monetary Policy Framework
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