William Kay: Savers gloomy as Bank cut fuels overheated house market

The Bank of England's bold decision to cut its base rate for the first time in 15 months was initially greeted by a subdued stock market, less cheered by cheaper borrowing than concerned at the Bank's warning that the economy is cooling.

Savers' hopes that they would not have to bear the full brunt of the cut were soon dented by Royal Bank of Scotland's TheOne account and Sainsbury's Bank, which cut their mortgage rates by the full quarter-point. But Ray Boulger, of the IFA Charcol, is right to recommend tracker mortgages: not only are they guaranteed to benefit by the full cut, they are a one-way bet on the likelihood that the next move by the Bank could be still another cut.

While this week's reduction was doubtless aimed at Britain's hard-pressed commercial sector, the housing market can only gain, as more buyers will be sucked in and supply will be fixed for the immediate future.

It is more problematical whether savers and investors should do much in response to the change, other than to scour the best-buy savings deals all the more thoroughly and consider moving away from scandalously low 0.1 per cent bank interest rates.

Chasing higher-yielding corporate bonds will mean swallowing higher risk. And, as the FTSE 100 index's reaction suggested, this is not enough to suggest it is the time to buy shares. The best policy is still to trickle money into shares and take advantage of falling prices.

* Gordon Brown's 1 per cent world may soon be seen in a similar light to Michael Jackson's Neverland, lots of bright, flashing lights but not many people on the rides. This week the Chancellor climbed down from his tree and sent his financial secretary, Ruth Kelly, to explain the Treasury's response to the Sandler savings report calling for a collection of simple unit trusts, with-profits bonds and pensions that anyone can buy off the shelf.

After six months of chewing pencils and flying paper aeroplanes around the room, its task force has not come up with much that is new. Above all, it is still wedded to the Sandler notion that 1 per cent is a nice round sum to charge punters, never mind whether it makes sense for providers. Much has been made of the Treasury's apparent willingness to hear representations, but they will take some persuading.

Good news for the public? Maybe, but look at the experience of a 1 per cent cap on stakeholder pensions: only 1.2 million sold, largely to the well-off, and a raft of providers withdrawing because they cannot make enough money. It is plain wrong-headed to think that even simple savings products can be sold without advice.

For the market these products are aimed at, advice means explanation and education, not just about individual products but whether and how such folk should save. The Treasury agrees providers often know a lot more than consumers without suggesting how to square this circle.

So the Government retreats into recommending as its model, cautious managed funds, putting no more than 60 per cent into equities, rather than the 85 per cent of so-called balanced managed funds, though the latter has attracted £43bn compared with just over £6bn for the cautious managed. But, like mother, Gordon knows best.

One reason few individuals want to brave these choppy markets is that most are driven more by fear than greed, except at the very top of a bull market, which is why so many pile in at the wrong time. Fear is a product of ignorance and, as Simon Davies of Threadneedle Investments put it this week, can produce stupid decisions. Indeed, such errors are more usually the province of the over-confident.

The Treasury response to Sandler is sadly unimaginative. I have sympathy for Marc Gordon, managing director of Close Fund Management, which runs one of the best protected investments. As Liz Walkington explains on the opposite page, protected investments are full of pitfalls, but it is hard to argue with the Close Escalator 100 fund. It has outperformed cautious and balanced managed funds over three, five and seven years. It banks profits every quarter, guarantees no capital loss and investors can get out at any time. It may not be perfect, but I suspect its main sin is that it is too new for those first-class Oxbridge brains at the Treasury to get their heads round.

* It was a pleasure to attend the private viewing of the Aztec exhibition at the Royal Academy this week, courtesy of F&C Management. But, after the stock market slump, I thought I glimpsed Jeremy Tigue, manager of Foreign & Colonial Investment Trust, wincing as he studied the dramatic statue of the Disembowelled God.

w.kay@independent.co.uk

The writer is personal finance editor of 'The Independent'