As the school term starts there can be no more excuses for putting things off until ‘after the holiday season’, so we felt now would be a good time to reflect on a key evolution for savers over the summer.
We’ve all seen enough column inches on Brexit and the subsequent UK base rate cut so this article will focus on the implications for inflation, stagflation and the subsequent impact for savers in the UK. The press surrounding the current interest rate environment rightly decries the current situation for UK savers. However, we believe that not enough attention has been paid to ‘Real Interest Rates’.
Real interest rates are the nominal interest rate minus the rate of inflation. This number is a much more important measure of the real impact of the current environment on people’s savings, measuring the spending power of those savings in the real world rather than just the nominal return from the respective savings product.
The most recent UK inflation data available is for July which showed a year on year increase of 0.6%; highest level for over 18 months. With a fall in the pound and a loosening of the fiscal purse strings, expectations for inflation are that this number will continue to rise over the coming months towards 1% by the end of 2016 and as much as 2.5% in 2017.
So, we are at that stage in a predictable cycle where inflation is climbing and interest rates are coming down which leaves the saver in the worst of all worlds. An individual with cash earning 0.25% in the bank is already losing money in real terms and could be losing as much as 2% per annum in the real spending power of that cash by the end of next year. That could extrapolate to a 22% loss in the value of that money over the next 10 years.
There are many ways of mitigating the effects of stagflation but the biggest issue remains individual inertia. One piece of good news over the last few years is the emergence of Challenger Banks who raise deposits by frequently offering much more competitive savings rates. Combining challenger bank rates with FSCS protection can materially mitigate the effects of stagflation.
We should all address this phase of the economic cycle and actively manage our cash in exactly the same way that we would manage our other assets.