Interest rate change: opportunity or setback?
Last month the Bank of England made the decision to cut interest rates for the first time since 2009. As part of a stimulus package for the UK economy following the Brexit decision, Governor Mark Carney announced that rates will be cut from a previous record low of 0.5% down to a new all-time low of 0.25%.
This has had repercussions across the financial sector, with Santander being the first high street bank to announce that it will be slashing the interest rate on its 123 bank account from 3% to 1.5%, effective as of 1 November. As the most popular current account in the UK, and with the possibility that other high street banks will follow suit, the impact is huge.
There are some lenders taking a different approach, including building society Nationwide (which has confirmed that it will rebuke the Bank of England’s decision, maintainig its interest rates for savers, but passing the cut onto those in debt). The instant reaction (including the gut one from mainstream media), is that this decision will hit savers hard. There is no doubt that for some (especially those who rely on the interest from their savings as a source of income) the decision will be unwelcome, andwill no doubt be particularly galling for those who were savvy enough to have shopped around for their savings account in the first place.
This is all assuming that you have any savings to begin with. There are two sides to every story, and those with few savings but with variable mortgages and other debts and loans stand to benefit from the cut, which will contribute to lower payback rates for period for which it remains.
As with any economic stimulus, it is important the decision is taken within context. The measure is one of four that has been designed to prevent an economic depression, the others being: a quantitative easing programme (long-hand for printing money); a buy-up of corporate debt to drive down funding costs; and a ￡100bn Term Funding Scheme to allow high street banks to borrow a proportion of their outstanding lending at a 0.25% rate. It’s also important to remember that the rate change is not a first, won’t be the last, and that the cut itself is hardly astronomical. There are many other instances of more significant changes with more profound effects, such as the interest rate hike of the early 1990s which saw people paying up to 15% on their mortgages and other loans.
Arguably as an impact of all the recessions that lie behind us, lessons have been learned, not least by the Bank of England, which explains its insistence on keeping interest rates low (the recessions of the early 1980s and 1990s were both preceded by periods of high interest rates). History has taught individuals to become more savvy with their money and not to just trust high street banks and lenders to make their money work hard, but to take matters into their own hands instead.
Millennials in particular are in a unique position here. Their current predicament has been created by a market that they weren’t old enough to be involved with, but are suffering the consequences of this through high debt and a lack of property. As such, they’ve learned the hard way that, when it comes to their money their destiny is in their hands. Our research supports this, showing that more than 68% of millennials are worried about money management and unsure about the financial options open to them. It is critical for millennials to increase their financial understanding, particularly when it comes to investing. Our research has also shown that one way to encourage this is through making learning how to invest a fun activity, which is where we come in.
At invstr, our focus is on empowering the masses and making financial information freely available. We believe in the power of individuals over their finances and that, whatever the next few years hold from an economic perspective, those who take full charge stand a much better chance of prospering than those who sit back and simply watch the markets.