personal finance

'Inflation reminiscent of the 1970s' – how savers can prepare for 'negative real yields'


Inflation is currently sitting at 4.2 percent in the UK, more than double the Bank of England’s target of two percent. The central bank has also warned inflation may continue to rise in 2022 and while Ms Davies noted that the sustained inflation reminiscent of the 1970s is unlikely, she said those who believe inflation will subside are equally wrong.

Inflation volatility

Ms Davies commented: “We believe we are entering a new inflationary era. But unlike the 1970s, it won’t be marked out by shockingly high inflation rates. Instead, investors will confront a world of inflation volatility. In this environment, the gap between interest rates and headline inflation will widen – creating a dangerous chasm known as negative real yields.

“Take energy prices, wages and interest rates. Rising energy prices were chief amongst the culprits in sparking inflation in the 1970s as well as wage fluctuations. Today, wages are less likely to spiral, and while oil and gas prices have more than doubled in the last year, the world is not likely to see the ten-fold increase in energy costs that triggered the 1970s inflation.

“Rather, the world economy today is more vulnerable to (and intolerant of) interest rate increases than it used to be.”

This intolerance of rate increases may explain the Bank of England’s relative hesitancy to raise rates. As inflation jumped in recent weeks, many expected the central bank would be left with no choice but to increase rates but at its most recent review, the bank kept the base rate unchanged at 0.1 percent.

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In early November, the Bank of England highlighted it may be preparing to increase interest rates for the first time in more than three years. The rate-setting Monetary Policy Committee signalled it’s getting ready to increase rates for the first time since August 2018.

In the minutes of its latest meeting, the bank said: “It will be necessary over coming months to increase Bank Rate in order to return CPI inflation sustainably to the two percent target.”

However, it also noted it has not yet reached that point in time, citing “near-term uncertainties” in the economy. The committee ended up voting seven to two to maintain the bank rate at 0.1 percent, with its next meeting scheduled for December 16.

The base rate, which impacts the rates set by retail banks, was reduced to 0.1 percent in March 2020, when the Monetary Policy Committee took action in an effort to protect the economy from the impact of the Covid pandemic. According to analysis from money.co.uk, a rise in rates would see mortgages become more expensive for anyone not on a fixed-rate deal, but could see savers earn more interest.

Assuming it’s passed on in full by banks, an increase to 0.25 percent will add around £120 to the cost of mortgages, but net savers just £15 extra in interest a year for every £10,000 they have in the bank.

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“Speak to your lender as soon as possible”

James Andrews, senior personal finance editor at money.co.uk, said the decision to raise rates is controversial.

He said: “On the one hand, the Bank of England is tasked with the job of keeping inflation under control. On the other it is asked to keep the economy growing.

“While making borrowing more expensive and savings more rewarding should, theoretically, see people spend less in shops and put pressure on retailers to cut prices – that doesn’t work if what’s pushing prices up is the cost of energy or raw materials.

“That means that, rather than pushing prices down, a rise in rates might simply force people to spend less – as more of their money is taken from pay packets by mortgages. That could be terrible news for an economy still struggling to escape the impact of coronavirus.”

While Mr Andrews noted the Bank of England is in a difficult predicament, a failure to act on inflation could see the markets and wider economic players lose confidence in its ability (or willingness) to tackle rising prices. Mr Andrews reiterated a rise in rates is typically passed on to the public but Britons can take steps to mitigate any damage.

He said: “Our advice to anyone worried about the cost of their mortgage rising as a result of the Bank’s decisions is to compare deals now, and see if you can lock into an affordable rate.

“Anyone struggling to make repayments should speak to their lender as soon as possible to see if there is anything it can do to help. You can also get free, independent debt advice from Stepchange and National Debtline.”

Those looking for decent savings deals will also struggle in light of the Bank of England’s commitment to low rates. According to analysis from Moneyfacts, the average no notice savings rate is sitting at 0.1928 percent, while there is not a single savings deal available which beats inflation.

Savers are unlikely to succeed in getting decent returns from savings rates but a number of switch incentives are available to those who are willing to shop around. However, Moneyfacts warned “time is ticking to get free current account cash perks” and as such, consumers must act fast.

The money comparison website warned a variety of current account switching cash incentives have recently been withdrawn and remaining deals are expected to vanish soon. Under its current plans, first direct will be withdrawing its £130 switching offer at midnight on November 22, 2021.

Additionally, from today, consumers have 10 days to take advantage of NatWest’s £100 cashback offer which will be withdrawn on December 2, while there are three weeks left to get a £125 cash incentive with Halifax on its Reward Account, which ends on December 14.

Virgin Money also tweaked the switching incentive last month on its M Plus Account, where switchers can receive a £150 Virgin Experience Days Gift Card or a free luxury 12-bottle case of wine from Virgin Wines, worth £150. Santander continues to offer £130 cashback on its 123 Current Account and Nationwide is still offering £100 for new accounts and £125 for existing account holders on selected current accounts.

Unfortunately, both HSBC and Lloyds Bank have now closed their most recent switching deals.

Rachel Springall, finance expert at Moneyfacts.co.uk, examined the importance of jumping on these deals where possible.

She said: “Banking customers looking to switch their current account will find a variety of cash switching perks on offer today to entice them, but some offers will vanish over the next three weeks.

“Current account providers launched free cash perks for customers who switch using the Current Account Switcher Service (CASS), however, some gave just a small window of opportunity for customers to apply, such as HSBC which gave consumers 14 days. One of the biggest cash perks on a current account which does not charge an account fee is for £130 with first direct, which is due to expire at midnight. In the weeks to come, so too will the £125 offer from Halifax and £100 offer from NatWest disappear.

“Those looking to get a better overall package with their current account will not only find Santander’s £130 switching cash offer appealing, but the 123 Current Account also boasts one to three percent cashback on selected household bills and Santander home or life insurance premiums and it pays 0.30 percent AER credit interest on balances up to £20,000, all for a £4 per month fee.

“The festive season draws ever closer, so some consumers may be considering a quick switch using the CASS for a free cash perk, but it is vital they choose an account which will work hard for them. Weighing up any incentives and fees, such as an overdraft tariff is important, and consumers must be confident to utilise any perks if an account charges a fee.”





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