What inflation means for investors, savers and homeowners

UK consumer prices inflation rate fell to the Bank of England's target of 2% last month for the first time since November 2009 soothing fears that interest rates could rise earlier than the Bank of England would like.

What inflation means for investors, savers and homeowners

Bank of England governor Mark Carney told markets in August last year the Bank would wait until unemployment fell to 7% before considering a hike in interest rates which have remained at 0.5% since March 2009.

But consistently higher than target inflation has fed speculation that the Bank would be forced to raise rates to stop prices getting out of control.

Meanwhile unemployment has dropped with the latest figure standing at 7.4% bringing the rate closer to Carney’s threshold.

But last week economists suggested the Bank may lower this threshold trigger rate to 6.5% to avoid having to raise interest rates sooner than Carney wants.

And Paul Sedgwick, head of investments at Frank Investments, said today’s inflation figures indicated that money pumped into the economy through quantitative easing was not making its way into people’s pockets, paving the way for Carney to kick the interest rate rise can further down the road more formally.

“If banks continue to bottleneck the funds and not feed money into the system, there will be no economic growth and any inflation without growth is cause for concern. At the moment the UK is not seeing any wage inflation and without this the economy will remain stagnated,” said Sedgwick.

“More needs to be done to set the funds free, to get it where it’s needed and not be trapped within the banking system. To help do this we can expect Mark Carney to step forward in the next few days and lower his forward guidance for interest rates changes by 0.5 per cent to 6.5% unemployment.”


Kevin Gardiner, chief investment officer at Barclays, said the biggest risk facing the UK economy was the “strange vacuum in interest rates”.

“This is public enemy number one,” he said. “We have to expect normalisation of monetary policy – and this is the most synchronised global economies have been since 2010. Frankly it may not be central banks’ call on when rates rise – the economy will dictate that.

“Governor Carney has found more recently that despite his repeated suggestion that UK rates will stay put until unemployment falls below 7% which he now expects in mid 2015, implied three month money rates are suggesting bank rates may rise sooner.

“Big turning points in interest rates…are usually driven by economies not by central banks. The latter preside over them and effectively rubber stamp the process with their policy rates but it is the interaction of increased demand for credit, savings ratios and the productivity of corporate capital that shape these big moves.”


Jeremy Duncombe, director of Legal & General’s mortgage club, warned that homeowners are “sleep walking into significantly higher mortgage repayments”.

As speculation continues as to when the base rate is set to rise, Duncombe said mortgage lenders will inevitably turn their attention to pricing in the change ahead of this move.

“This means that with rate rises currently predicted for 2015, the historic low mortgage deals available at the moment don’t look set to last into the medium term,” he said.

A rise in rates of just 0.5% on a typical mortgage worth the UK average of £150,000 would amount to an extra £62.50 per month. That equates to a not insignificant £750 per year increase in mortgage bills.

Duncombe added: “Borrowers can’t afford to be complacent and should talk to an adviser to tie down a more favourable deal while they still can.”


To beat inflation, a basic rate taxpayer at 20% needs to find a savings account paying 2.50% per annum while a higher rate taxpayer at 40% needs to find an account paying at least 3.33%.

Of the 624 non-ISA accounts in the market today there are 31 that taxpayers can choose to negate the effects of tax and inflation.

ISAs present a slightly better story with 46 out of 240 ISAs now offering rates that beat inflation.

The effect of inflation on savings means that £10,000 invested five years ago, allowing for average interest and tax at 20%, would have the spending power of just £8,838 today – a fall of 11.62%.

Sylvia Waycot, editor at Moneyfacts.co.uk, warned that savers still feel despondent and ignored.

“The interest paid on savings accounts continued to plummet throughout 2013 past one sickening low and then another, whilst inflation has added a double whammy of misery,” she said.

The withdrawal of the government’s Funding for Lending Scheme in December 2013 has been tipped to herald the return of competitive savings rates but Waycot warned this is unlikely to materialise for some months.

But she said the ISA season will be a good indicator of how things may develop for the rest of the year.

Waycot added: “Today’s news of a fall in CPI will be welcomed but it won’t change the average no-notice savings account from paying a miserly 0.64% or the fact that that savers who don’t want to lock their money away for any length of time, really have no chance of achieving the 2.50% needed just to counter the effects of inflation and pay the taxman’s share.”

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