In a blow to retirement savers and pensioners, the Bank of England has kept interest rates at the record low of 0.5% and voted to inject £50 billion more cash in to the economy by quantative easing.
The net result is interest rates on savings accounts and ISAs are unlikely to rise in the imminent new financial year and the price of gilts is likely to slip even lower.
For those approaching retirement or living off fixed pension income, the news is all bad.
Annuity income is fixed on gilts and rates have already plummetted and falling further just makes financial planning tougher for the over 55s and gives them less money to spend.
Bank rates were anchored at 0.5% in March 2009 and have not moved since. The new QE programme will bring the total spent on buying gilts to £325 billion.
“Some recent business surveys have painted a more positive picture and asset prices have risen,” Bank of England Governor Mervyn King said. “The pace of expansion in the United Kingdom’s main export markets has also slowed and concerns remain about the indebtedness and competitiveness of some euro-area countries.”
Some commentators are worried that the bank is shovelling more cash in to the economy by quantative easing without having enough data to review whether the tactic is a success or failure.
The theory behind QE is simple:
• The Bank of England buys gilts with newly created money
• Sellers of gilts deposit that money in banks
• Banks lend that money to help boost the economy
• Gilt yields fall, making interest rates lower across the economy
• Borrowing becomes cheaper so more economic activity occurs
The reality, according to pensions guru Dr Ros Altmann, director general of over 50s group Saga, is different.
“The jury is still very much out on whether QE is actually providing an economic stimulus,” she said. “Despite the billions of pounds of new money, consumer lending fell last year, growth weakened and inflation sapped consumer confidence.
“Even if initial gilt-buying did provide a boost, it is clear that the lower gilt yields fall, the less effective the policy becomes. I believe, at current levels, no further stimulus will be achieved by continuing with QE in the same way.”