Interest rate rises but savers will still suffer

BRITAIN’S biggest banks are under fire for planning to hit homeowners with interest rate rises today while not raising rates for savers.

The Bank of England raised the base rate of interest by 0.25 percentage points to 0.75 per cent yesterday, up from 0.5per cent. The rise is seen by many as an attempt by its Governor, Mark Carney, to build defences against a potential economic downturn post-brexit.

Last night banks confirmed so-called “floating rate” mortgages would rise in line with base rate as soon as today, affecting millions of borrowers. But Lloyds, Nationwide, RBS, Barclays and HSBC remained silent on whether savers would see any benefit.

James Daley, of Fairer Finance, a consumer campaign group, accused banks of “passing on the pain” to savers. He said: “Banks always pass the pain on to savers but not the benefits. It is particularly egregious after so many years of dismally low savings rates. The Government and regulators should put pressure on them to play fair.” Around two thirds of mortgages are fixed deals and borrowers will not see payments rise until their term ends.

Rates last rose in November, which was seen as a correction of a post-eu referendum cut. The Bank’s monetary policy committee voted unanimously to take rates to the highest level in nine years. The pound spiked following the decision, but enthusiasm on the currency markets quickly faded as Mr Carney warned that policy needed to “walk, not run” ahead of Brexit.

Yesterday’s interest rate rise was a reminder that the world is still recovering from the credit crunch, that we are still living in an age of emergency measures. An increase to the highest level since 2009 pushes the rate to a paltry 0.75 per cent. It comes as data shows Britain is becoming a nation of borrowers, with households in the red for the first time since the consumer boom of the late 1980s. Memories remain strong of what came next – high inflation and high interest rates. The rate hit 15 per cent during the 1992 ERM crisis, a nightmare that has haunted policymakers ever since.

But the idea that we can just cruise along with today’s globally low (even negative in real terms) interest rates and quantitative easing is a fantasy. In this environment, bubbles expand in property and the stock market. If Brexit does cause a slowdown, a rate of 0.75 per cent won’t leave the Bank of England with much to cut to stimulate growth. And the rate is still far too low to make a meaningful difference to long-suffering cash savers, which, lest it be forgotten, greatly outnumber increasingly profligate borrowers. Low rates have made cash saving virtually pointless.

The picture might be grim, but there are still levers for governments to pull – and it is hugely frustrating that the Conservatives don’t use them. Here in Britain, infrastructure investment moves at a snail’s pace and housing remains in short supply. Apart from some intelligent cuts during the coalition, taxes have either stayed the same or effectively gone up – with profound effects upon the economy. Our property market, for instance, remains distorted by stamp duty. Businesses and individuals wait nervously to discover which taxes are going to rise to finance a £20 billion splurge on health.

The direction of policy is wrong – the Tories should be making savings in public spending and passing the benefits on to the taxpayer. The Government should be thinking much more actively as to how it can cut taxes, especially if there is a no-deal Brexit. Indeed, if the Government is willing (rightly so) to spend our money to prepare for no-deal, why not also commit now to sizeable tax cuts? If the EU won’t meet us halfway in talks, let us out-compete them. The long-run goal should be a low-tax British economy with sensible interest rates, less borrowing, more saving and a booming private sector.