Kate Hughes: Carney's line on interest rates is bad news for retirees
Friday 09 August 2013
Considering that actually, not a lot has changed for the man or woman on the street, the Carney press conference, formally known as the Bank of England Inflation Report, has caused quite the hoo ha.
To recap for those who had real life to contend with on Wednesday, he announced (as many had predicted) the introduction of forward guidance, which essentially means the Bank will keep the base rate at "emergency" levels until unemployment drops.
Of course, we've had the same, historically low interest rate since early 2009, and many of us had assumed this state of affairs was unlikely to change anytime soon anyway. Now we know that rates won't creep past 0.5 per cent until the unemployment rate falls below 7 per cent – around 750,000 more jobs which forecasts indicate will be in around three years' time.
Housebuyers will be happy, and we may well see even better home-loan rates in their way. But that's where the positives end.
Those who have been desperately trying to wring every last little piece of interest out of wafer-thin savings rates have had their fears confirmed and are being urged to consider the risk-reward pay-off of investing to alleviate the pressure of inflation.
The country's pre-retirees are being asked to think about doing the same thing. But frankly, they're stuffed. The low-rate environment has already caused annuity rates to plummet to record lows and such a state of affairs is now highly unlikely to change. The scary thing is that it makes the effect of the pensions shortfall we're all constantly banging on about – the massive gap between what we think we need as retirement income and what our pensions savings will actually give us – even worse.
Figures from Axa Wealth show that those aged over 55 are at particular risk with an average shortfall of just under £7,900 a year, a gap 71 per cent larger than the national average.
They're saving just 29 per cent of what they need with the shortest amount of time to put more away and now, no expectation of a let up on annuity rates.
As pensions guru Dr Ros Altmann added: "With an ageing population we need to encourage saving so that people have money for their future, but this policy environment undermines incentives to save. It may suit borrowers short term, but it has dangerous, longer-term consequences."
But I also agree with her point that if you take a step back not only do these seem to be emergency measures for a non-existent emergency, but such a move to tie interest rates to employment figures further distances them from the real economy and the rate of inflation.
What we're now looking at is the reliance on borrowing at unrealistic rates and house -price rises to boost growth. What pre-crisis circumstances does that bring to mind?
In fact, the whole thing reminds me of an email I received from a reader this week. When Stan Warring retired in 2007 he says "I was able to invest some capital and the interest was approximately £350 pcm (per calendar month).
"This money was spent on various things, which I presume helped the local economy. The interest on this same capital is now approx £100 pcm. I am fortunate that I don't need to use the capital to subsidise my income, so the economy loses out by the difference.
"I can't be the only person in this position, so rather than the Bank of England bailing out people who have borrowed more than they can afford, perhaps it should increase interest rates, give people some extra money to spend and try to get the economy back on its feet."
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