Aidan Bailey of THE FRY GROUP cautions UK savers on what to look out for as inflation rates spike and interest rates remain low.
In April 2010, the UK’s Consumer Price Inflation (CPI) rose from 3 percent to 3.4 percent. This, according to the Office for National Statistics (ONS), was the result of a relatively strong dollar, higher refining costs, the increasing price of oil and food and the rising price of imported goods due to a weakened Pound Sterling. The continuing rise in Value Added Tax (VAT) – 17.5 percent as of January – and flat gas bills, which plummeted this time last year, have also contributed. Other rising costs include clothing prices and airfares – which increased by 11.3 percent in 2009.
These figures are bad news for UK savers, as the real value of your savings will diminish rapidly if you can’t find accounts paying rates to match the inflation increase. For expatriates, finding a bank account offering more than 3 percent is a challenge and the hurdle is even higher for UK tax payers. The inflation rate has now exceeded the Bank of England’s set target of 2 percent and is at its highest level since January 2010. According to financial website Moneynet, savers paying basic rate tax need to find an account paying over 4.25 percent to ensure their savings keep pace with inflation. Higher rate taxpayers would need to find an account paying 5.67 percent to match CPI figures.
So why aren’t interest rates rising? Despite the sharp rise in prices, analysts expect the rate of inflation to take a back seat as weak economic growth and high unemployment dampen rising prices. This theory is further underscored by the governor of the Bank of England, Mervyn King, who has implied inflation will shrink towards 2 percent in the coming months. Analysts expect the Bank of England to keep interest rates low, in order to stimulate growth. "We would not expect the Bank of England to be swayed by short-term movements in commodity prices, so today’s figures should not have much bearing on interest rates. We still expect rates to remain on hold for the remainder of this year," said Hetal Mehta, Senior Economic Adviser to the Ernst & Young ITEM Club.
UK interest rates have been at a record low of 0.5 percent for 13 consecutive months. Policy helped bring the UK economy out of recession in the last quarter of 2009 – when it grew by 0.4 percent. But if prices continue to rise sharply, the Bank’s Monetary Policy Committee (MPC) may have to raise rates. And if the CPI inflation rate remains above 3 percent, Mr King will have to write yet another letter of explanation to the Chancellor.
Aidan Bailey BA (Hons) CertPFS AWPCM
General Manager Singapore, International Division