The new Governor of the Bank of England, Mark Carney, dealt a huge blow to savers today, as he revealed the Bank will not consider pushing up interest rates, until the unemployment rate falls to 7%.
The current jobless rate stands at 7.8% and to reduce the level to the proposed new threshold would mean an additional quarter of a million jobs would need to be created.
Delivering his first Inflation Report Mr Carney said could take a further three years.
With at least a nod to the Bank’s inflation target, Mr Carney said the new threshold would remain, unless inflation rose significantly or there were other threats to the UK’s financial stability, such as a housing bubble.
Mr Carney also said, that until the 7% threshold was reached, the Bank would not cut back the existing programme of Quantitative Easing, which currently stands at £375 billion.
The news interest rates are likely to stay low for at least three more years, will come as a huge disappointment to savers and would-be retirees, although it will of course benefit those people and businesses borrowing money.
How will savers be affected?
Over the past few years’, savers have been hit by a double whammy, as interest rates have fallen to levels never seen before and inflation has risen. The toxic combination has eroded the real value of many people’s savings.
Interest rates, which were already low after the financial crisis, dropped even further, following the Funding for Lending scheme, which was launch in August last year.
Today’s announcement basically means savers will have to continue to accept inflation will erode the real value of savings, for at least a further three years.
On the plus side, Mr Carney’s announcement does at least give savers some much needed clarity as to when savers and retirees can expect interest rates to rise again. Although, this will give little comfort to millions of savers, who have seen the buying power of their capital reduced year on year.
Will the news reduce Annuity rates?
After falls at the start of the year, Annuity rates had started to rise over the past couple of months, mainly on the back of rising gilt yields and a hope that interest rates might start to rise sooner rather than later.
The recent rises had led to some would-be retirees delaying their decision to purchase an Annuity, in the hope rates might rise still further. However, today’s announcement, which could see base rate held at 0.5% for a further three years, will significantly dampen any hopes that Annuity rates will rise significantly in the short term.
For more information on when to buy an Annuity read out latest blog: As Annuity rates pick up should you defer your Annuity purchase?
A housing bubble?
Some financial experts are concerned that today’s announcement, when added to other measures such as the Help to Buy scheme, could lead to a new housing bubble.
Whilst existing homeowners might be keen to see the value of their property rise after the slump in 2007 / 2008, rising house prices will undoubtedly make it harder for would-be first time buyers, who are already struggling to save a large enough deposit.
“Playing with fire”
Reaction to the speech from Mr Carney was swift and mixed.
The Institute of Economic Affairs said: “ To try to use monetary policy to reduce unemployment when inflation is already above target is playing with fire and could lead us down the road that we followed in the 1970s. This move also calls into question the independence of the Monetary Policy Committee and the Bank of England’s ability to fulfil its statutory duties.” (Source: Telegraph)
Whilst Simon Rose of Save our Savers, a pressure group set up to encourage more support for savers, said: “The Bank of England has failed to meet its inflation target for most of the past seven years. Now it clearly has decided to ignore even higher price rises, inflicting continuing misery on the majority of Britons, in the hope that the same policies that have failed the country since the crisis will somehow magically work in the future.”