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Time to face the truth

20 September 2011 / by Oliver Roylance-Smith

Earlier this month the Bank of England Monetary Policy Committee (MPC) voted again to maintain interest rates at 0.5%.

This news was quickly followed by an increase in both measures of inflation, with the Consumer Price Index (CPI) rising to 4.5% and the Retail Price Index (RPI) increasing to 5.2%.

Interest rate woes

The MPC’s decision to keep interest rates unchanged means that the official rate has now been held at this record low for the 30th month in succession. Although this may be good news for borrowers, this is providing a constant challenge to both savers and investors alike.

The current economic environment has also provided an unusual amount of agreement between economists; however, whereas a month ago the consensus was well into 2012, this latest decision has moved the goalposts to 'at least 2013'. The key message here is what action needs to be taken?

The real impact of inflation increases

With both CPI and RPI increasing, the pressure on the day to day cost of living for everyone in the UK is a major cause for concern, despite the Bank of England’s attempts to reassure us that it expects inflation to return to its target of 2% in the next two years.

This reassurance is speculative at best when looking at the prevailing economic conditions and falls far short of offering any sense of short term hope to the sharp increases seen for example in petrol and energy prices.

This also means that in order to only match inflation, basic rate taxpayers need to find a savings account that pays at least 5.625% and for a higher rate tax payer it rises to 7.5%.

Time to face the truth

This combination of continued low interest rates and increasing inflation demands attention and it is vital for both savers and investors to keep an open mind regarding their options.

Understanding the implication of low rates on fixed rate bonds, maximising Cash-ISA allowances and giving full consideration to alternatives available in the market are all good places to start.

Standing still for too long or losing sight of the real impact of inflation can produce painful results. So perhaps now is the time to face the truth and make sure your savings are working for you, not against you...

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The value of investments and income from them can fall as well as rise and you may not get back the full amount invested. Different types of investment carry different levels of risk and may not be suitable for all investors.


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