2012 proved to be even more difficult for savers than expected but will there be any change in 2013? Here we take a closer look at what the developments in recent months might mean for the year ahead and what we should be considering in order to make the most of our hard earned savings.
2012 – far from vintage
Savers will no doubt concur that 2012 will not be remembered as a vintage year. The Bank of England’s base rate remained at its record low of 0.5% for the entire year (and where it has been since March 2009) whilst the government’s Funding for Lending Scheme brought further challenges to an already dampened market by offering cheap money to banks. The result was that many of the high street names involved in the fixed rate and Cash ISA market disappeared completely leaving those looking for a good deal with even fewer options.
A further blow was brought about by consumer inflation which remained stubbornly higher than its target throughout 2012. Although there was a welcome reduction to the highs of 5.2% in the previous Autumn, combined with the paltry rates available on savings accounts the recent inflation levels have created a torrid time for savers looking to achieve a rate that enables them to maintain the spending power of their money.
2013 – for better or for worse?
So what changes lie afoot? It would be great to feel that although 2012 was one of the toughest on record for savers that at least the worst was behind us and that a brighter future with higher rates was on the horizon. Unfortunately, this would not appear to be the case.
In order to put this into context we need to consider the factors that influence us the most when making decisions around our savings and in particular, the main two drivers that can affect the rate we receive, namely the Bank of England base rate and inflation.
Bank of England base rate
With the interest on savings accounts being closely aligned with the Bank of England’s base rate (the ‘base rate’), its future prospects are important to understand. A status quo of the current record low 0.5% for all of 2013 would seem to be a given among economic experts but more worrying is that their previous estimates of 2016 as the earliest date for a likely increase is now being pushed back even further.
Investment banking giant Citi predicts the Bank of England will not raise rates until mid-2017 as it battles to restore the economy to health. Citi chief UK economist Michael Saunders stated: ‘The economy is likely to disappoint again in 2013 and we expect that growth will stay weak in 2014.’
With the threat of a triple dip recession looming and mounting fears that the UK could also lose its AAA credit rating, this prediction adds to a gloomy start to the New Year and the prospect of eight years of ultra low interest rates – potentially good news for borrowers but the worst case scenario for savers. The only factor which could herald a shift is if inflation rises higher then the Bank would be pressured into increasing rates to tackle it.
Although the trebling of university fees and rising food prices were pointed to as the main reasons behind the previous increase in the cost of living, this is far from the complete picture. Higher energy prices are expected to push inflation over 3% and the rate is more likely to remain high due to the massive adjustments the UK economy must undergo following the financial crisis.
Spencer Dale, chief economist at the Bank of England said that the economy is ‘still adjusting to the new realities associated with the global financial crisis, in particular the unprecedented weakness of productivity [and] the repeated rises in commodity prices’. Considering the relationship between the oil price and UK inflation this is a real concern and combined with rising food prices, savers continue to finding themselves increasingly worse off.
The threat of inflation
So how will this adjustment take shape? John Chatfield-Roberts, chief investment officer at Jupiter Asset Management and someone who had previously warned inflation could near double digits over the next five years, is the latest in a string of high profile investors to warn on the dangers of inflation believing that it is higher than the level being recorded and that we should all be wary of the threat it poses in the longer term.
The economic reality would seem to be that the quantitative easing programme has added to the already challenged financial environment by storing up inflationary problems and that growth is required fast in order to be able to maintain control and stability. Unfortunately the recovery continues to be slower than expected.
Expect the unexpected
This all points to a continuation of the trend of inflation being consistently above the government’s 2% target with monetary policy apparently powerless in expediting a fall. Over the last 5 years, inflation has averaged around 3.3% and there is nothing in the current outlook which suggests why this will not be the case for the next 5 years.
However, there is every possibility that the unique nature of quantitative easing could breathe inflationary fire into the UK economy and taking into account the genuine uncertainty as to how this will unravel, this should perhaps be considered a best case scenario.
Time to act smart
With little or no prospect for interest rate increases plus continued above target inflation and the potential for volatile increases to the cost of living, these really are difficult times for savers, but at the moment it is hard to see how savings rates will rise this year. Banks will continue to have access to cheap funding via the Funding for Lending Scheme until at least the summer but even afterwards, it is not clear there will be a sudden return to offering competitive deals in order to seek out our nest eggs.
So another year of the same would appear to be on the cards and look beyond that, with a particular eye on the inflationary environment, things could start to get a lot worse. Certainly those who rely most on their savings to supplement their income or simply to provide a net return after tax and inflation are being hit hard by the lack of competitive fixed rates, especially in the medium to long term.
This is putting even greater pressure on savers to take a long hard look at how they split their money and failing to act in the hope that things could take a change for good could be extremely costly.
The bottom line …
Even with the Consumer Price Index at its current level of 2.7%, a basic rate taxpayer needs to achieve at least 3.38% just to stand still. With the number of savings accounts falling by over 350 during 2012, this downward trend has continued and there are currently no accounts paying close to this level of interest, regardless of how long you are prepared to tie your money up.
With many of the offerings looking to remain highly uncompetitive it is easy to see why the market for alternatives to the more traditional fixed rate option is proving more and more popular. The potential impact of the economic landscape on our savings is perhaps more important to understand than ever before and certainly demands our close attention.
Although fixed rate bonds will remain an important part of the savings jigsaw, their status as being the only option needs to be considered against the economic landscape that will affect every saver in the UK.
These challenges help us understand why the opportunity to generate higher returns, ideally over and above inflation, is a compelling one and is where the structured deposit offers a compelling alternative as well a genuine compliment to the more traditional options. Since the returns are not guaranteed these are not designed to meet the entire needs of every saver but this needs to be balanced against the economic reality we are all facing.
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No news, feature article or comment should be seen as a personal recommendation to invest. If you are in any doubt as to the suitability of a particular investment you should seek independent financial advice.
The alternatives discussed in this article are structured deposit plans that are capital protected. There is a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In this event you may be entitled to compensation from the Financial Services Compensation Scheme (FSCS), depending on your individual circumstances. In addition, you may not get back the full amount of your initial investment if the plan is not held for the full term. The past performance of the FTSE 100 Index and any of it shares is not a guide to its future performance.
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