Since the credit crunch of 2008, interest rates have been woefully low. In July 2007, it reached 5.5 per cent and by last August it was down to a record 0.2 per cent. This might be good news for those on tracker mortgages, but for anyone looking to save, the low corresponding interest rates make it incredibly hard to make a meaningful return.
So why are interest rates so pathetic? As with all things macroeconomic, there is no single reason, but an interdependency of affecting factors. The main influencers have been:
1. The Government’s Funding for Lending Scheme (FLS)
This kicked off the era of rate cuts by giving banks access to low-cost, publicly-backed funding that they could lend out. This meant that lending institutions no longer needed to attract savers in order to raise funds for lending – and the incentive to offer high rates disappeared. This trend looks set to continue, with forthcoming easements to capital adequacy rules – basically freeing up even greater reserves for banks to lend out at a profit.
2. The Personal Savings Allowance
The PSA came into force last April and has had an immediate effect on ISA savings rates. This is because savers can earn up to £1,000 in interest on their savings without paying tax, so the allure of ISA tax-free savings wrappers has diminished. As a result, interest rates are languishing.
3. Pension Freedoms
A surprising influencer on interest rates, but the recent reforms do have an affect. With more choice for pensioners on how they spend their pension pots, many have withdrawn large sums and sought to keep them accessible in savings accounts. This has led to a glut in supply of savings capital – further driving down interest rates, as there is no need for banks to compete for scarce customer capital.
4. Ongoing economic uncertainty
Political events such as Brexit, the ongoing war in the middle east, concern about the future of Europe and other ongoing events mean that there is heightened uncertainty in the financial markets. For the UK, there is little clarity on what Brexit will actually mean for the economy and for savings. Uncertainty always means that investors hold off on committing to new projects or investors until they can gain certainty over their projected returns.
So, although there is no single factor, these combining pressures have created the ‘perfect storm’ for low rates – and the trend looks set to continue. One area of concern for the government will be the high levels of personal debt in the UK for example, meaning a risk of defaults if base interest rates started to push up the cost of repayments. With the government keen to demonstrate prosperity, growth and an attractive business environment to investors post Brexit, it seems likely that interest rates will remain low for some time yet.