4 August 2016 will go down in history as the date when the Bank of England cut the base interest rate to a 322-year low. The Monetary Policy Committee were unanimous in their decision cut interest rates but what do their decisions mean and how might this impact your savings and investments?
Savings in cash or under the mattress… there’s no difference
Interest rates have been cut to 0.25%, this is the rate the Bank of England will charge to lend money to commercial banks. Banks are still able to set their own interest rates but many choose to mirror movements set by the Bank of England. Individuals are likely to see their interest rates fall even lower and some banks have started to talk about charging for accounts in credit. If the base rate is low, it is harder for banks to make money on your savings so they are unlikely to offer a good interest rate.
Added to this we have seen the pound drop in value, in fact, 15 minutes after the announcement the value of the pound fell by more than 1%. A drop in the value of a currency is likely to lead to inflation, it will cost you more to buy the same thing. Inflation changes on a monthly basis so savers need to keep an eye on this and ensure that they have inflation beating returns.
Seek returns by investing
Savers will need to find ways to off-set the impact of inflation. However, the cut in interest rates signals that we are facing a weak economy so finding returns will be more difficult. A diversified exposure to a range of asset classes will be the most cost effective way of achieving returns. Savers should look to diversify in terms of asset-class and currency exposure.
The Bank of England has also announced a programme of corporate bond buying. This could be good for individuals with corporate bonds in their investment portfolios. The bond buying programme is likely to drive down yield which would push up returns and continue to support growth in this asset class.
At a time when there is pressure on returns savers need to be more conscious of cost than ever before. Minimising cost is the best way to achieve stronger returns in the long term. Savers and investors should ensure that they are aware of all costs that they are charged as many providers have hidden fees. A digital wealth manager, such as Moneyfarm, has a simple and transparent cost structure where you pay a management fee and the fund cost and nothing else.