Will they, won’t they, and when?

Will they, won’t they, and when?

18th May 2015

The great interest rate debate has been keeping the financial press talking for years now. At one point it wasn’t just about will the Bank of England raise interest rates, but it was even would they cut it further? Now with the UK election over and the economy growing, Jim Coupe, Managing Director of Skipton International assesses the investing landscape.

After the uncertainty ahead of the General Election in the UK, things have settled back down again and generally the economic data is positive. Although the Bank of England has revised down its growth forecasts to 2.5% for this year, from the previous 2.9%, and wage increases have only been moderate, there is still growth evidence to balance forecasts, with a faster fall in British unemployment than expected. It means the Bank is still being cautious, and it has indicated that we are unlikely to see any rise in interest rates until the second quarter of next year. So where does this leave investors who can’t afford to take risks with their money, but want a return on it?

An improvement in the economy is obviously welcome relief to all, and for homeowners and those with other loans the continued record low interest rates will also be good news. However for those of us who have savings and are trying to earn an income – particularly pensioners, the prospect of an interest rate rise drifting into next year, and then probably only rising slowly, is not a positive one.

There are many different investment options from shares to bonds, property to alternatives such as art or stamps and coins, but invariably there are people for whom some, or in some cases all of their wealth, will be held as liquid cash. There are many reasons for this. Firstly it is always advisable to have some liquidity in a balanced portfolio, but for many people the reasons are more down to risk appetite.

The UK Department for Work and Pensions recently carried out some research when it was developing its new pension plans into attitudes towards investment choice and risk*. It threw up some interesting results, not least the fact that there was a growing feeling amongst the public that employer pension schemes were becoming more risky, which is seen in the rising number of self invested pensions, but also because many people recognized that investment options such as shares were also volatile and even if they had the potential to make bigger gains, there is the risk of also losing.

The consensus was that a offshore savings account with a bank or building society was a low risk product which kept their capital safe, even if in recent years the rate of return has been relatively low. Guaranteed returns were a big draw and it’s not surprising. People have worked hard for their money, and they want to keep control of it, whilst also earning an income in a safe environment.

So, although savings accounts might not seem like the ‘sexy’ products in the investment world, they are its bedrock. At Skipton International we know this from what our customers have been telling us which is why we maintain a portfolio of access, notice and fixed rate accounts to provide a choice of return and commitment.

One of the other considerations which again came up in the Department of Work and Pensions’ research, was that investors consider information to be critical. Our own customers tell us that they want clear, transparent products and that’s what we provide. Establishing a relationship with a customer is very important. At Skipton International we are in it for the long term, we don’t want to attract a new customer with an enticing rate and then quietly adjust those rates down once they’re on board. In fact, we have just rewarded our existing customers by offering them an attractive loyalty product. We also promise that we will communicate all changes clearly and honestly.  After all, the customers are entrusting us with their savings, we take that responsibility very seriously.

With estimates that one in seven of us (UK research) will retire without a pension, finding safe and reliable homes for our money is likely to increase in importance over the coming years, regardless of when Mr Carney and the Bank of England decide to put up interest rates.

*Department for Work and Pensions Research Report No 565, carried out by the Personal Finance Research Centre.