By STEPHEN MARRIOTT 30/06/2009
Last week, the US Federal Reserve announced that it was leaving interest rates unchanged, at a range between zero and 0.25%, and that it would continue to support credit markets by proceeding with its $300 billion Treasury purchase plan. In Europe, it was a similar story as the European Central Bank pumped €442 billion into the banking system at a rate of 1%. In the UK, the Bank of England continued to hold base rates at 0.5%.
Low interest rates and the various emergency credit measures have been important antidotes in treating the credit crunch. But, for those people reliant on their savings to live, such measures are of little comfort. However, more recently short term fixed rate savings deals (1-2 years) have increased a little and the best deals now offer over 4%. Medium term government gilts (5 years) currently return around 3% (gross redemption yield).
Inflation has always been the biggest threat to savers but with recent dramatic falls in the consumer price index (CPI) and the retail price index (RPI), the burden of lower rates has been alleviated to an extent. Of course, inflation could rear its ugly head and many commentators believe this is an inevitable consequence of quantitative easing. Nevertheless, the trend is currently down and this is something that appears to be recognised, but not fully appreciated. The real (inflation adjusted) return from cash has averaged 1% over the last one hundred years (Barclays Gilt Study) and real rates currently stand at 1.6%*.
Consequently, if inflation does continue to fall, fixed rate savings deals in the region of 4% and five year gilt total returns of around 3% could prove to be attractive for savers.
For information on the current cash savings rates available or if there is anything else you would like to discuss please call one of our Advisers on 020 7189 9999 or e-mail us at best@bestinvest.co.uk.
* 0.5% Bank of England Base Rate – RPI (negative 1.1%)