With recent news that the Bank of England has opted again to keep interest rates low at 0.5pc for the 44th consecutive month, savers are becoming increasingly frustrated at the low rates they’re seeing on the investments that are hinged to the national rate — like ISAs and other equivalents. The Bank of England has projected that rates may remain this low for up to another two years. This means you may need to rethink your savings and investment strategy in light of this reality. Here are a few thoughts on the topic to weigh the pros and cons of making changes to what you’re doing now:
- The Good News – The good news about low interest rates is that they’ve done a few things. First of all, it’s already pushed a lot of people and institutions from the typical “savings” investments into riskier stocks and bonds, which was partially the intent of the programme. This means anyone with some stocks either held separately or through a pension or fund, should have seen their returns rise over the past few years. This has also pushed interest rates down for housing, so as a potential buyer, you may be seeing the lowest interest rates in a long time. Likewise, with more buyers interested at lower rates, this should have boosted the housing market a bit (or at least housing prices have not crashed to the degree they could have if nothing was done).
- The Bad News – The bad news is almost the flipside of everything above. Since it’s been a few years now and investors have already flocked to more risky investments chasing higher returns, the game could be played out already and it may be too late to make a switch without buying at the top. Also, there’s not really much room for rates to go lower. So, should the economy worsen or the Bank of England look for additional measures to boost investment, options are limited. Finally, interest rates can’t stay this low forever or eventually inflation would take hold. Therefore, rates will rise eventually, which typical hurts bond investments, sometimes housing and sometimes stocks. The markets are very complex and depend on many things, but a few years out when rates rise, anything could happen.
- Investment Themes – So, you might be wondering what you should do. I would start by saying that if you’re comfortable with your current investments, do nothing different. There’s no sense in chasing different asset classes around based on interest rates when there are professional firms and traders that do this for a living and might be on the other side of that trade. However, if you’re not earning enough on your investments in safer assets like ISAs, you need to evaluate what your risk tolerance is. If you feel you could take more risk, then stocks or bonds would be suitable. But if you’re not comfortable losing a substantial portion of your investment over a brief period of time (with opportunity comes risk!), then you should not alter your current approach.
The information in this article is provided for education and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness or fitness for any particular purpose. The information in this article is not intended to be and does not constitute financial or any other advice. The information in this article is general in nature and is not specific to you the user or anyone else.