The Bank of England has raised interest rates to 1 per cent. This comes after an increase to 0.5 per cent in February and an inflation increase to 7 per cent in March.
It is the fourth consecutive rate hike, bringing the base rate to 1.00 per cent, the highest level since 2009.
Cash savers will lose 6 per cent of their purchasing power each year due to the 1 per cent interest rate hike and 7 per cent inflation rate, according to experts. According to Aegon, this is the worst period for cash savers since November 1977.
Aegon pensions director Steven Cameron says: “In response to soaring inflation, the Bank of England has increased interest rates for the fourth consecutive time to 1 per cent, the highest rate since February 2009 but still very low in historic terms. While this could provide a small boost to cash savers if the rise is passed on to saving accounts, any benefit in purchasing power will be wiped out many times over by rocketing prices, with the most recent inflation figure of 7 per cent at a three-decade high and expected to rise further. Those in cash savings paying 1 per cent interest are losing a huge 6 per cent a year in purchasing power.
“Aegon analysis of inflation and interest rates over the last 50 years shows that people are losing more purchasing power now than at any other time over the last 44 years. You need to go back to November 1977 for as bad a situation, when inflation was at 13 per cent, or 6 per cent above the base rate of 7 per cent.
“When inflation was last as high as it is now, in early 1992, the base rate was sitting at over 10 per cent. That meant cash savers achieving this return were still beating inflation and seeing their purchasing power increase by around 3 per cent a year.
“With inflation likely to remain well above interest rates for the foreseeable future, individuals might consider investing any cash savings they are unlikely to need in the short term. However, investing in stocks and shares comes with risks and can go down in value. It can be worthwhile seeking financial advice.”
Broadstone technical director David Brooks says: “The latest Bank of England (BoE) interest rate rise may well have been expected, but over recent months gilt yields have increased significantly and this could have had a material impact on DB pension schemes’ funding positions, depending on the level of any interest rate hedging that is in place.
“All else being equal, schemes that are not fully hedged will have seen their funding positions improve over recent months. While any underhedged position may be proving a positive contributor this is not something for Trustees to be complacent about and should be a position taken consciously.
“The statement from the BoE that inflation will reach 10 per cent in Q4 this year, nearly 1.5 per cent higher than the Office for Budget Responsibility (OBR) predicted, will be concerning. However, this may encourage schemes, particularly those that are now better funded, to consider de-risking their positions. At the very least they should be reassessing whether their liability hedging programmes remain in line with their intended targets given the significant moves in both interest rates and inflation.
“Trustees and sponsors should also watch carefully the impact of interest rate hikes, both in the UK and elsewhere, on the wider economy as this may yet depress the recovery from the Covid-19 pandemic.”
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