Brexit is coming – in some form or another – and among the changes in its wake, some experts are forecasting a fall in interest rates.
When those experts include members of the Bank of England Monetary Policy Committee, the forecasts they make may have some weight behind them.
Michael Saunders has been a member of the Monetary Policy Committee, the committee responsible for setting Bank of England base rates since 2016. He recently made a speech that addressed the impact on business of uncertainty caused by the UKs exit from the EU – and in it suggested that interest rates could fall regardless of the form Brexit actually takes.
It’s all about uncertainty
The general sentiment is that the UK economy is sound, and that leaving the EU might mean a short-term period of readjustment. However, no nation has ever left the EU before, and as we have seen, the Brexit process has defied predictions at every stage.
This means uncertainty, which is bad for the economy. Businesses don’t know where or how to invest, when they don’t know how their markets will look next month. Consumers don’t like to spend, as worries about the economy translates into personal worries about jobs and incomes. Investors find it hard to know where to invest.
If we have a deal, some of the uncertainty might be removed, and the brakes might come off the economy. But if we leave without a deal, a cut in interest rates might be the simplest way to stimulate the economy, and to help it through a transition phase that could be painful.
But Mr. Saunders believes that the base rate could be cut even if a no-deal Brexit is avoided. He said that he expects to see continuing uncertainty in the UK regardless of what happens next with its relationship with Europe – “particularly if global growth remains disappointing.”
The pound dropped 0.5% against the dollar immediately after his speech last week, with a pound worth 1.2272 dollars.
In the US, the Federal Reserve has already cut interest rates – and the European Central Bank cut rates and put more money into the markets through quantitative easing. It looks as though the Bank of England really will follow suit.
What does a fall in interest rate mean?
At 0.75%, the base rate might not seem to have much room to fall. When it went up just a quarter of a percent for the first time in nine years last August, the effects did not seem that pronounced, other than to suggest that the economy was finally over the financial crisis. If it falls back to its historic low of 0.5% or even lower, the actual effects may be similarly undramatic.
You may find yourself paying a little less for your mortgage, particularly if you chose a tracker. Many businesses will find themselves better off. Long term loans from banks and other lenders are frequently pegged to base rate.
If so, homebuyers and businesses would feel a boost, which may well have the desired effect of freeing up cash to stimulate the economy. But where there are winners there are sure to be losers, and the losers from a bank rate cut would be savers and people such as the retired who are living on the interest their savings earn.
If you might be affected, it could be time to take action.
What can you do?
If falling interest rates make savings even more unrewarding than they already are, it might be time to look at investing some of your savings, rather than holding them all as cash. Cash savings are safe and the returns are predictable, but if they are predictably lower than you need, then investing may be the answer.
Fortunately, at Continuum, we can help you get started as an investor. It does not have to be all about big risks, watching the FTSE and buying shares in companies you have never heard of. There are plenty of investment funds which can provide the prospect of steady growth and strong returns – and even those which may gain in value when interest rates fall and the pound falls with them.
If you have not been an investor in the past, our free guide to investment, our weekly education mailer, our Personal finance portal and personal support from your Continuum adviser can make it all much simpler than you might imagine.
To see how easy it can be to get started, simply call us now.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
The value of investments and the income they produce, can fall as well as rise and you may get back less than you invested.