The pandemic delivered an economic blow to the whole world, and even if the worst of Covid 19 is past, the financial pain is not fully over yet.
However, on a positive note, many commentators point to rising stock markets and suggest that recovery is on the way. A spending spree by consumers delighted to be freed from lockdown may be only one of the factors driving this resurgence. But if you are a saver, beware. The recovery may have a sting in the tail for savings.
At Continuum we are looking at why – and what you can do to reduce the negative side of the recovery.
What has happened to savings?
Savings used to be the bedrock of good financial management. Before the last financial crisis it was often possible to enjoy rates of 10% or more on savings. The near collapse of the banking system in 2008 brought an end to that when the Bank of England base rate dropped to an historic low of 0.5% and then to an even lower 0.25%. Banks and building societies had little option but to cut the rates on savings accounts. It became hard to find a home for cash which could keep up with inflation which was at times running at 3%.
There seemed to be some good news for savers in August 2018 when the interest rate was at last hiked to 0.75%. Then Covid struck.
Many countries went into months of lockdown to stem the spread. It meant a global standstill, with central banks around the world forced to slash interest rates to prop up national economies.
Low bank rates returned with a vengeance. The current Bank of England rate is just 0.1%, and there may be a possibility that the UK will follow Japan with interest rates that are actually negative.
The low returns on cash savings look set to stay. But the problems don’t end there.
Inflation may be coming
Inflation is the familiar phenomenon of rising prices, the discovery that the loaf we bought last week for £1 is £1.20 this week. It’s main causes are either excess demand or rising external costs.
Covid and lockdown reduced economic activity all round, bringing down inflation. Recovery is already driving up demand for everything from raw materials to luxury goods. Excess demand will make inflation inevitable.
The government, or rather the Bank of England on its behalf, will usually try to control inflation by increasing interest rates, reducing the amount of money people have to spare, and so reducing demand. But the country is now in the process of climbing back up from the deepest recession of modern times. There is little appetite for increasing interest rates and risking choking off recovery in the process.
Savers are faced with a costly combination. Low interest rates generate a poor return on their money and inflation which ensures that putting money in a savings account means watching it lose its real value.
Inflation may be part of the price of getting the country back on its feet. The government may even be making it part of their strategy for recovery.
What can you do?
Inflation may be coming, but it may be possible to prepare for it. If you put your money into investments, rather than keeping it as cash savings, you may be able to avoid its value being whittled away.
There is a downside to investment. In a savings account, your money up to £85,000 is protected by the governments’ Financial Services Compensation Scheme (FSCS). Investment means some risk. The value of investments is not guaranteed, they can fall as well as rise, and if a business fails, you could lose your capital. Investors can lose money – but in return for the risk, they could make more than savings will offer and with proper advice, it should be possible to keep the risks under control.
Starting investing can seem a big step, but with help from the Continuum team, investing – in a tax-free ISA – can be as easy as saving. We can help you select funds where your money will be invested by expert managers with the aim of providing the growth or the income you need.
The Financial Conduct Authority does not regulate deposit accounts.
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 can fall as well as rise and you may get back less than you invested, Capital is at risk.