You probably don’t need to have a penchant for economics to have heard the news that the Bank of England cut base rates to new record lows on the 4th of August, and announced that they would be pumping a whole lot of money into the economy as part of the plan. Given that the economy has been in a bit of tumultuous state since the EU referendum vote, it’s been framed as a welcome boost for all of us.
But what does it actually mean for us as consumers, and how will it benefit us?
As you’d expect, it isn’t all as simple as it sounds.
If you’ve got a mortgage with a variable rate, it’s great news as you will likely soon start to save money on your monthly repayments. In fact, for those in general who are looking at loans as a means to finance certain purchases, it will now be even cheaper to borrow money, and to make the repayments. There are other positive effects for the economy too, as an injection of money will keep things moving and encourage spending, which will hopefully help to keep a recession at bay.
The not so good
The big downside of an interest rate cut is that it conversely affects those of us who have savings. Banks have already started to cut the already poor returns offered on savings and current accounts, while some have even threatened that negative interest rates could be on the horizon in the near future. That means being charged for keeping your money in the bank; something that will be difficult to swallow given the recent bailout of these high-street behemoths.
For pensioners, this is not great news either. Retirement funds are typically heavily linked to savings and annuity rates, and both will inevitably fall even further than they already have.
There are a few other big disadvantages to an interest rate cut that will affect households. Firstly, money being injected into the economy will fuel spending, which in turn is likely to fuel inflation. If this does occur, it will hit all of our pockets as prices of consumer goods go up.
The other thing which will likely occur – and has already happened to some extent – is that the pound will weaken against other currencies. Aside from being a big blow to those of us who are keen to jet off abroad on holiday, this will also sting us at home. A high portion of the goods a British consumer typically puts into the shopping basket are imported, and a weaker currency means that prices of these goods will inevitably rise across the board.
What to make of it all
Depending which camp you are in, last Thursday’s announcement may have been received as good or bad news. All we know for certain is that an uncertain road probably lies ahead for the UK economy, and everyone within it.
So, what does it mean for us as consumers, borrowers and savers?
Keep calm and carry on for one thing. But it’s also a great time to take stock of things within your household, and, more specifically, spending versus income. It’s quite frightening to note that one in three UK working families are one monthly pay packet away from losing their home, while nearly 17 million working-age adults have zero savings. It’s a sobering set of statistics showing how close to the edge many families live.
To avoid putting yourself at risk, try as far as possible to run a tighter ship, and to squirrel away as much in the way of savings as you can – or finding more lucrative alternatives for investing your money. It doesn’t mean the axe needs to fall on all your leisure spending, and that no fun can be had. But even just a month of careful and practical budgeting will likely expose easy wins in terms of savings; which often just require a small amount of restraint or sacrifice.
All in all, no one does rolling up the sleeves and facing the music like us Brits do. With a bit of savvy, discipline and teamwork within your household, this is a storm we can all ride out together.