Money Matters

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Recent comments from both the outgoing governor of the Bank of England, Sir Mervyn King, and his replacement, Mark Carney will not be welcome news to millions of households who are worried about low growth on their savings over the coming months.

Both governors have indicated that inflation could rise in the near term, above its May level of 2.7 per cent (CPI) and may remain above the BoE’s two per cent target for the next two years.

News from the Lincs Free Press and Spalding Guardian,, @LincsFreePress on Twitter

News from the Lincs Free Press and Spalding Guardian,, @LincsFreePress on Twitter

Yet interest rates are likely to stay low. Interest rates have remained at 0.5 per cent since March 2009. Most analysts do not expect any change in policy until the new bank governor, arrives in July. Raising interest rates could help to subdue inflation but that’s not on the incoming governor’s agenda.

In a speech at the World Economic Forum in Davos in January, Mark Carney said that he is willing to see higher inflation for longer in order to boost the economy.

Good news for borrowers perhaps but meantime savers are left to seek inflation beating returns as the gap between interest rates and the rate of inflation erodes their capital and can result in falling income for those who are hoping to supplement their income from their savings.

In Legal & General’s latest survey, around 90 per cent of people questioned about what they thought would happen to inflation in the next 12 months said they expected inflation to be higher or to stay the same. More than half (53 per cent) think it will be higher.

What is remarkable is that there are billions sitting in accounts which pay virtually no interest.

According to a survey published by Lloyds TSB in April more than £900billion is held in bank and building society deposits and National Savings accounts. Since the Bank of England started cutting the savings rate the “typical” savings rate you can get for money on deposit or in a cash ISA has plummeted.

Therefore, if savers have any money invested in cash that has a return of less than inflation then they are losing money in real terms.

So if that money is just sitting there earning little or no interest it would make sense to start making it work a little harder to avoid erosion by high inflation and perhaps to generate a little extra income.