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Consumers face mixed fortunes following Bank of England announcement

As interests become tied to unemployment figures, analysts predict rates will not rise until 2016

The Bank of England has tied interest rates to the country's unemployment figures

Interest rates will only rise above current level of 0.5% if unemployment rate drops from current rate of 7.8% to below 7%

The latest announcement by the Bank of England (BoE) on its future interest rate strategy is likely to have mixed fortunes for consumers.

Unveiling the measures, the new governor of the BoE, Mark Carney, said that interest rates will be tied to the country’s unemployment rate, and promised not to increase the current record low levels unless unemployment falls or inflation escalates out of control.

It comes after a meeting of the Bank’s Monetary Policy Committee (MPC), which voted to provide some explicit guidance regarding the future conduct of monetary policy.

Greater certainty?

In setting out a plan of forward guidance, the BoE hopes it will provide greater certainty to investors, savers and businesses about what is expected to happen in the months and years ahead.

Interest rates will only rise above the current level of 0.5%  if the unemployment rate drops from its current rate of 7.8% to below 7%, but this has not happened since early 2009, leading analysts to predict that it could be late 2016 by the time such a fall is recorded.

However, Mr Carney commented: “It is important to stress that forward guidance does not mean the MPC is promising to keep interest rates low for a particular period of time. The path of Bank Rate and asset purchases will, as always, depend on economic conditions.”

Mixed fortunes

The effects of the move will provide mixed fortunes for consumers, with homeowners and those entering the property market set to benefit, while many savers will lose out.

Greater certainty over interest rates will be music to the ears of mortgage holders and those looking for their first property, as mortgage rates are likely to remain low and could even fall further if lenders choose to cut prices to stay competitive.

Another possibility is the introduction of longer-term fixed rate mortgages of ten years or more, which would have a major effect on helping property owners to plan their financial futures.

According to Ray Boulger, senior technical manager at  independent mortgage adviser John Charcol, there is “every reason” to think that the current level of fixed rates is rock bottom, but he also noted that there is no reason to expect rates to increase soon.

“For existing homeowners looking to remortgage, there is no point in waiting in the hope of lower rates, but also no need to rush if personal circumstances dictate waiting a few months would be preferable,” he added.

Savings suffer

It is likely to be a different situation for savers, however, with continually low bank rates making it difficult to get a good return on savings. The announcement that quantitative easing measures will only be relaxed if the employment threshold falls below 7% will also be unwelcome news to those hoping for major returns on the money they have in the bank.

The effects will also extend to pension savers, as low interest rates, coupled with a higher rate of inflation, could lead to the erosion of existing savings. Annuity rates will at least be subject to a degree of certainty, with current rates expected to be maintained for some time.

Andy Zanellli, head of retirement planning at AXA Wealth, said the BoE’s announcement offers “no respite” to those who have already been affected, and will impact many more individuals.

“Four years of record low interest rates have severely impacted and eroded savings across the UK, resulting in lower disposable income and returns,” he explained.

His comments were supplemented by AXA figures, which show that the average shortfall in pension provision for UK adults is currently £4,600 per year, providing significant long-term savings challenges for consumers.

Market response

The impact even extends to holidaymakers, with the financial markets having a confused response to the governor’s forward guidance plans.

Immediately after the announcement, the British pound initially fell by almost a cent against the US dollar, before recovering to $1.549, while sterling also fluctuated against the euro, before finishing up 0.75 per cent at €1.162. With rates likely to continue yo-yoing in the days and weeks ahead, it is likely to be an uncertain time for those exchanging currency ahead of their overseas holiday.

There is good news, at least, for businesses, particularly SMEs, as the extra certainty regarding rates could lead to smaller firms becoming more confident about investing without later being caught out by rising interest rates.

One big supporter of the announcement is Trades Union Congress general secretary Frances O’Grady, who said the Bank clearly understands that a real recovery is something that benefits “ordinary people”, and is not just an “upward blip” in economists’ outlooks.

She added: “People will ultimately judge the recovery on the availability of good jobs and whether their disposable income is rising again, rather than economic forecasts and partisan spin.”

The road ahead

The key question now will be how long inflation and the unemployment rate remain within the parameters set out by the Bank. Analysts expect the Bank Rate to remain at 0.5% for at least a further three years – something backed up by the BOE’s own forecasts – with unemployment staying above the 7% target until at least the third quarter of 2016.

Factors such as a change in employment terms – something that will resonate with the hundreds of thousands of people caught up in the current government investigation into zero-hours contracts – will likely impact the unemployment rate, but for the time being it seems that interest rates will be staying put.

For homeowners and property buyers, the Bank’s announcement provides an opportunity to take advantage of that rare opportunity – a degree of financial certainty, at least in the short-term. For savers, the outlook is less clear, meaning now may be the time to shop around.

  • Andy Cash

    I think in these austere times, those without savings must come before those with, so overall a good decision. It’s also great to have some clarity for once.

  • steven frost

    How much interest does the government pay on the monwy it borrows? If it higher than the interest paid to savers by the banks. If it is, can’t there be a way that savers lend money to the government possibly saving the country money with a lower interest rate and giving a better income to savers.

  • Chris Young

    Why must those without savings come before those with?? Some of us pensioners are having to now live off our savings, as we receive only the basic state pension – unlike those with wages several times our income. We have been responsible and resourceful and struggled to save for our old age, and now we are being penilised

  • Andrew D. Potts

    Basically it’s the same old unfairness of people who are careful, look after themselve, dont spend what they haven’t got and save for thier future are being hit again because of those that have had a good time in the past. THERE IS NO INCENTIVE TO BE GOOD AND WORK HARD, a lessen i’ve learnt far too late in my life.

  • Kevin

    so small firms benefit bit cannot recruit anyone as the rate will rise if they do! catch 22?