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Interest Rate Decision – Industry comment

  • By Georgie Davey
Bank of England

Gwilym Lloyd Jones, Wealth Planner at financial firm Sanlam UK:

“With post Brexit fears of a recession and speculation about quantitative easing on the horizon, Carney is navigating stormy seas. Today’s cut won’t come as a shock to the market, with the majority having already priced in a rate cut. The announcement will be a further blow for savers, who are already facing the prospect of low returns on their cash, and will now also see higher inflation eating away at their savings.

“This news isn’t without a silver lining – home owners may see their mortgage costs fall, with the current low mortgage rates looking set to drop even further.”


Steve Griffiths, Head of Sales and Distribution at Kensington:

“With uncertainty still making waves in the markets, the Bank of England has made the decision to lower interest rates to a new historic low this month. Amid this ambiguity about what Brexit means for the economy, brokers must use every opportunity they can to make sure their clients are getting the advice they need.

“That means consulting their back books and speaking with not just customers who circumstances fit more simple mortgage applications, but also those individuals whose working backgrounds mean they require more specialist advice. Ultimately, it’s this group that will need expert advice the most, if they are to secure a good deal in these uncertain times.”


Jeremy Duncombe, Director, Legal & General Mortgage Club:

“Following the vote to leave the EU, there has been much speculation around whether the Bank of England would reduce the base interest rate. Today’s decision is therefore not too much of a surprise.

“However, whilst this action by the Bank is significant, it is unlikely to have much impact on current fixed rates for mortgages. Despite the base rate remaining at 0.5% for seven years, fixed rates have been falling consistently since 2009. Many lenders will have thus already priced into their products and deals such a reduction in rates, with few looking to drastically amend their offers off the back of today’s news.

“The fact remains that current fixed rates represent a good deal for consumers, and borrowers would be prudent to use these prevailing circumstances to speak to an adviser about remortgaging options available to suit their individual financial needs.”


Andy Cumming, Head of Advice Close Brothers Asset Management: “An interest rate cut rubs salt in the wound for savers, who have already faced seven years of rock bottom returns on cash savings. They now have to contend with even lower rates, and increasing inflation eating away at their savings. For those looking to set aside money for the long-term, investment options will become more appealing by contrast.

“The benign rate environment also has the negative effect for those approaching retirement and considering an annuity. With lower rates, and reduced yields on government debt, fixed annuities could suffer for those securing a product. With annuity pay-outs already falling following the landmark Brexit vote, this retirement income option could become even less popular.

“On the positive side however, those saddled with mortgage debt may find rates become even cheaper. Already at or near historic lows, those on tracker rates or on the cusp of remortgaging should see their monthly costs diminish, offsetting some of the damage to savings rates.”


Nancy Curtin, Chief Investment Officer at Close Brothers Asset Management:

“The Bank of England’s wait-and-see policy has clearly run its course following the recent spate of disappointing economic data. Weak service and manufacturing PMIs point to domestic uncertainty, and Carney has followed through on his promise to do what it takes to support and stabilise the economy. The double dose of monetary stimulus, with rate cuts accompanied by quantitative easing, will help ease investors’ jitters. However, monetary policy cannot do all the heavy lifting, and the market will look to fiscal policy to boost UK growth amid ongoing post-referendum uncertainty.

“Markets began pricing in an easing of monetary policy as soon as the referendum result became known, but we expect bond yields to fall further following today’s stimulus. Investors need to consider the price they are paying for safety, and the diminishing returns on offer.”


John Goodall, CEO and co-founder of Landbay:

“Today’s decision to cut interest rates was widely anticipated, but it is a disaster for savers. The base rate has now officially fallen below the rate of inflation (CPI), so for the first time since 2014, real interest rates are negative. If banks do decide to pass the cut on to savers, cash on deposit could be effectively losing savers money. Unfortunately, the outlook for savers is bleak as CPI is expected to rise further and rates are likely to remain low for a long time. It is important that people are aware of the many alternatives providing a resilient and rewarding home for their money.”


Dominic Grinstead, Managing Director at MetLife UK: “The first rate cut since March 2009 will help ease business uncertainty and boost the economy but the only certainty for cash ISA savers is yet more pressure on their returns.

“Cash ISA savers have received just 6.8%* in interest since March 5th 2009 when the Bank of England Monetary Policy Committee cut rates to 0.5%.

“From 2010 to 2013 average inflation was higher than average cash ISA rates which means savers effectively lost money.

“Currently most cash ISA rates are around 1%.  With more than £61 billion invested in cash ISAs last year** it is clear that savers and their advisers need to look for alternatives that offer the potential for more competitive returns. One such example is a guaranteed ISA – the MetLife ISA Portfolio gives the choice of receiving a guaranteed level of income for life, or a guaranteed capital amount at the end of a chosen term.”


Gonçalo de Vasconcelos, CEO and co-founder of SyndicateRoom: “In today’s economic environment where interest rates are at record lows, there is a greater need than ever for UK investors to seek alternative routes to returns on their investments. Britain is a nation of savers and investors and for individual investors, today’s decision may be seen as another blow to expectations for household financial planning. It makes it even clearer that alternative investments offer the opportunity for long-term financial gains.”


James de Sausmarez, Head of Investment Trusts at Henderson Global Investors: “Human beings are naturally risk adverse. It’s a cognitive bias that is hard to overcome when we consider our savings. This flaw in our thinking compels us to cling to the nominal cash value of our savings, so in recoiling from taking investment risks, we unwittingly suffer the corrosive effect of inflation. Our research shows you can be near certain you will lose money over the longer term by putting your savings in cash accounts, as the cost of living, and expectations for living standards will quickly climb out of reach of the paltry returns on cash deposits. It’s costing us billions of pounds every year.”


Steven Cameron, Pensions Director at Aegon:

“The further cut in interest rates means now is probably the worst time ever to be making a retirement decision, with those buying an annuity today locking in to super-low returns for life.

“After 7 years of low rates, there’s no guarantee we’ll see any significant improvement in interest rates or annuity terms in the short term. But those not ready to make a ‘once in a lifetime’ decision could consider deferring their retirement date or alternatively keeping their pension fund invested and drawing a retirement income direct from their fund.

“Advisers can recommend tailored investment strategies to reduce risk, potentially including elements of guarantee.”


Kevin Caley, Founder and Chairman of peer-to-peer lender ThinCats:

“By dropping interest rates to 0.25%, the Bank of England is attempting to stimulate the economy and the move will be welcomed by businesses in need of funding to grow and UK exporters who could benefit from a further weakening of the pound.

“But a base rate cut can only feel like a further tax for the millions of people who rely on interest from their savings and pension investments. Monetary policy is a useful tool, but unless the Government can find a way of achieving meaningful economic growth, we are likely to be in this situation for many more years.”


Richard Stone, CEO of The Share Centre:

“The latest move by the Bank of England was expected. However, it may prove premature if the data being highlighted at present is representative of a knee-jerk reaction to the Brexit vote, rather than the actual medium term impact. We are only six weeks on from the referendum and it still feels too early to judge the impact, including what effect the devaluation of Sterling will have in boosting exports. The Bank clearly needed to be seen to be responding to the latest market survey data and if proven to be unduly pessimistic this decision can of course be easily reversed.

“Personal investors will not welcome the latest move from the Bank of England with just over half of the respondents to our latest survey indicating they were worried about further interest rate cuts. It may bolster asset prices in the short term as money flows from cash into risk assets, but for investors seeking to drive an income from their savings, this move further encourages investors to take capital risk. Many will be uncomfortable doing so.

“This encouragement is further amplified by the new Dividend Allowance which came into effect in April 2016. This allowance enables investors to earn up to £5,000 of dividend income without paying any tax.

“We would encourage investors seeking income to use the dividend allowance and their full ISA allowance ensuring any income is tax free. When selecting investments, if choosing individual dividend paying stocks research is vital. For investors who are less confident or experienced, funds may be an appropriate alternative and a low cost diversified tracker such as one covering the FTSE All Share may be a reasonable vehicle. With the FTSE All Share currently yielding over 3% this may give access income with diversification to help reduce capital risk. The market has been volatile since the referendum and the capital risk cannot be eliminated. This means that investors who are likely to need to draw on their capital in the foreseeable future will find themselves in a particularly difficult place in trying to drive an income from their savings without increasing their risk exposure.

“Finally, the interest rate cut does nothing to help Millennials or Generation Rent. Everyone should be looking to make some savings and investments, however modest, for their and their family’s financial security. While asset owners may benefit from increased asset prices pushed higher by low rates and quantitative easing, those trying to start out will find it increasingly difficult. Any cash savings will earn little and the rate cut will do nothing to boost incomes by reducing mortgage payments for a generation increasingly likely to be renting or still living at home. Getting started on the savings and investment ladder will continue to be challenging and as with other investors there is an encouragement to take greater risk in order to seek out some income or capital growth.”


Peter Michaelis, head of investment at ATI and manager of the AT Sustainable Future UK Growth fund:

“The Bank of England’s widely anticipated decision to cut interest rates to 0.25% today will ensure that sterling will remain weak, benefiting those companies that invest in US dollars. It will also be supportive of housing and consumer spending, but short term these factors are driven more by sentiment and at the moment this looks poor. Losers include banks and insurers given current long, flat and low yield curves.

“Over the long term this is the right medicine for the UK economy; however there is now only one more spoon of medicine left before rates are at zero. Given recent weak economic data, there is also likely to be additional government stimulus for the house building and infrastructure sectors this year.”


Simon Clements, global equities investment manager at ATI:

“Global stock markets have largely already priced a rate cut at the Bank of England in, and so once again sterling is likely to bear the brunt of the decision. Overall, it shouldn’t make a huge difference to the economy. Keep an eye out for more quantitative easing; however stimulatory/unorthodox monetary policy may have reached the limit of its effectiveness, but it will lend further support to equities and other risk assets.

“The issue is that markets are now anticipatory, rather than reactionary, and as Carney has been flirting with a rate cut since the Brexit vote happened, they expected it. The pressure is now on to deliver something, if only to bolster investor confidence and reassure markets that the BoE is standing by with support. Having said all this, fiscal policy may be the real lever that policy makers are preparing to pull.”


Neil Brown, European equities investment manager at ATI:

“Central banks around the world and particularly perhaps the US Federal reserve will be keeping a close eye on the Bank of England today. A degree of rate cut has already been baked-in by the markets given weak PMI data over the last few weeks and is what is needed. However, the run the FTSE 100 has enjoyed post-Brexit means the market response is likely to be muted. As further stimulus raises questions around ‘what next’, small cuts of this 0.25% variety are marginally positive and unlikely to spook investors.

“European markets will continue to remain focused on political risk, both at the national election level and on the future shape of the European Union, as well as on the not unrelated issue of how to resolve Italy’s banking problems within the existing rules.”


 

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