We assess how savers and investors might respond to the Bank of England’s emergency rate cut.
• Recent market falls increase cash balances as a % of assets
Today’s interest rate cut from the Bank of England ahead of today’s UK Budget was a quick SOS response to the unprecedented threat of the coronavirus and takes interest rates back to historic lows of 0.25%.
UK markets have responded positively to the ‘bad medicine’ – but how will savers and investors swallow it?
Moira O’Neil, Head of Personal Finance, interactive investor, says: “Whilst we have seen more buying than selling during the recent market volatility, from a cash perspective these rate cuts can be painful for investors as well as savers.
“Firstly, stock market falls shrink your portfolio and so effectively increase your cash balance as a percentage of your overall assets. For example, our average customer cash balance has increased from 11% on 24 February 2020 to 13% as at today, and market falls will be a significant factor.
“It’s worth assessing just how much cash exposure you have – not just in your savings accounts, but in your investment accounts too – you may have more cash exposure than you think. Whilst cash is a haven in volatile markets such as these, too much can be a cold comfort as you run the risk of losing out to inflation. This cut is bad news for those who diligently, but misguidedly, save large amounts over the long-term in Cash ISAs, thinking it is their nest egg. It should be a wake-up call for these savers to think about a long-term investment plan that can grow their money.
“Secondly, for those investors who may have been tempted to reduce their stock market exposure in the recent market volatility, this rate cut is effectively a double hit. Experienced investors will be holding tight. Nervous investors may prefer to drip feed further investments into the stock market on a monthly basis. This means you buy less shares when prices are high, and more when prices are low, removing some of the risk of market timing.”
Myron Jobson, Personal Finance Campaigner, interactive investor, says: “For the average Joe and Jane, the cut to base rates could help remedy the economic impact of COVID-19. Those with tracker mortgages, who should see their rates drop - although those with fixed rate deals will have no such luck. But the cut to interest rates is a bitter pill to swallow for savers who have struggled to get a decent return in the low interest rate environment which has now become the status quo more than a decade on from the financial crash. Savers will hope that banks and building societies will be as slow to pass on the reduction in interest rates to savings accounts as they were to apply the modest 0.25 percentage point rise in base rates to 0.75% back in August 2018.”
Lee Wild, Head of Equity Strategy, interactive investor, says: “The 11-year bull market has arguably been the most hated of them all. Customer cash balances have hovered around the 11% mark over the last few years and barely moved even after a thumping Tory victory at December’s election.
“With coronavirus causing havoc, and UK trade negotiations due a return to the headlines, investors now find themselves with a more attractive entry point. They may well be waiting for it to become even more so. But trying to time the market can prove costly. Record low interest rates mean investors receive little return on cash, while plenty of stocks still pay well-covered dividends and a healthy yield. For sure, pessimists always have their day in the sun in the end, but the low risk approach will continue to deliver low rewards whilst failing to capitalise on buying opportunities meanwhile.”
Richard Hunter, Head of Markets at interactive investor, commented “Markets had been hoping for a coordinated turbocharge from the Central Banks, which given the decreasing lack of firepower for most given the stimulus measures already introduced, could have limited effect. However, if this is accompanied by a pledge from governments to add fiscal stimulus into the mix, the combined statement of intent could well underpin market sentiment.
With some interest rate cuts already announced globally and hopes for a similar statement from the US imminently, the Bank of England have now made their contribution on the monetary side for easing conditions in what could be a beleaguered UK economy in the short term. The baton now passes to the government ahead of the Budget, where hopes of fiscal policy easing will now be heightened.”
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