Bank of England raises Bank Rate to 0.5%
2 November 2017
At noon the Bank of England Monetary Policy Committee (MPC) raised the Bank Rate in the first time in a decade by 0.25% to 0.5%.
Whilst this is good news for savers, in reality the increase merely puts us back in the same place as last year before a cut in rate was made from 0.5% to 0.25% in reaction to the decision to leave the European Union.
The last time the MPC raised rates was 5 July 2007 and at that time the Bank Rate was increased from 5.5% to 5.75%. We may have a while to wait before we get back to those sort of interest rate levels as the Bank has been keen to stress, to balance the interests of borrowers as well as savers, that any further increases will be gradual.
The Bank Rate at 0.5% remains low and although we have seen banks and building societies deposit rates edge up in the last month they are still far lower than we have seen in the past.
It can be tempting to look at alternatives to cash deposits when savings rates are so low. Whilst we believe that investment portfolios will likely deliver better long-term returns, this is not a risk-free option and therefore moving funds from a very safe environment to one where capital is at risk needs to be considered carefully and as part of your longer term plan.
Banks or building societies remain the safest place to keep your cash in the short term. Keeping enough money easily accessible on deposit is a high priority for your financial security and this should be one of the foundations of your personal financial plan. Resist the urge to commit this ‘emergency’ money to longer term investments even though you may be given the promise of a higher investment return. The prospect of higher returns usually comes with higher risk or the inability to access your money quickly.
Although you should be holding adequate reserves of cash, over longer periods of time, historically the return on deposits struggles to keep pace with inflation. Inflation is rising and is significantly higher than the rate of interest you earn on most deposit accounts, so this money is effectively losing value each year.
Please speak to your usual Old Mill contact if you want to discuss your individual situation with one of our financial planners.