Saving rates diminish

March is a month of coronavirus anniversaries, and one of the ones we need to mark is the fact that it is one year since the Bank of England base rate plunged to its current record low of 0.1 per cent.

Since March 19 2020, when the Bank of England announced its second cut in as many weeks, rates have been at 0.10 per cent. The decision has had knock-on effects on the way we manage our personal finances, whether we are aware of them or not.

Why Bank Rate matters?

The Bank of England’s job is to keep inflation slow and stable and changing the Bank Rate, or base rate is one of the important ways that it can do that. The higher the interest rate it sets, the more commercial banks are rewarded to lend money to the bank, which means they are incentivised to play it safe and not lend money out.

Commercial banks pass on the types of rate they receive to their customers, which is why, if the Bank Rate is low, the rates on your savings accounts are too. Bank Rate also influences the value of Government bonds, a crucial part of many investment portfolios.

Why did the Bank of England cut rates to record levels?

Cutting rates, as the Bank did last March, is meant to stimulate the economy by encouraging people to spend, while it also reduces the amount it costs to service existing debt.

When the Bank cut rates in March, it said that it was doing so in response to the ‘economic shock’ of coronavirus, adding that the cut would "help to support business and consumer confidence at a difficult time, to bolster the cash flows of businesses and households, and to reduce the cost, and to improve the availability, of finance".

The UK is not the only nation with record-low rates. Some countries have even cut rates to negative levels, and there are frequent rumours that the UK could do the same, to increase demand.

What effect has the rate cut had?

As expected, low Bank Rate has resulted in low savings rates from high street banks as well. Figures from Moneyfacts, the financial data experts, state that the average easy-access rate was 0.63 per cent in March 2019, 0.56 per cent in March 2020, and is now just 0.16 per cent. The number of savings accounts available has fallen too, to 1054 from 1351 in March 2020.

But this has not stopped people from saving, despite the fact that in many cases their cash is losing money in ordinary savings accounts. According to the Bank, 28 per cent of us increased our household savings in 2020, with higher earners saving more. With only 10 per cent planning to spend the savings they’ve got, many of us have money languishing in the bank on low rates.

Some people have invested the money instead, which can bring higher returns. However, financial regulator the FCA (Financial Conduct Authority), warned this week that some young people are taking on unnecessary risks, partly because technology makes this easier.

Sheldon Mills, Executive Director, Consumer and Competition at the FCA, says that the regulator is worried that some investors are being tempted - often through online adverts or high-pressure sales tactics - into buying higher-risk products that are very unlikely to be suitable for them, and that its research showed that they do not always understand the risks.

What happens now?

While the coronavirus crisis continues, interest rates seem likely to remain low. However, a summer spending spree, if restrictions are loosened, could cause inflation. Inflation would make it even harder for most of us to get a real return on money in the bank, though it could make for rate rises in the longer term.

On this one-year anniversary, the message remains that we need to ensure that we have sufficient money in easy-access accounts but consider appropriate investment strategies as well for the money that we might not need for longer. The future still looks uncertain, so it is important to understand the implications of the decisions you take.