Why Mrs May MUST stand up for savers

Theresa May’s call for interest rates that give a decent return on investments will be music to the ears of legions of British savers. since the financial crisis hit more than eight years ago, cash savers have suffered from negligible returns, making life harder for those dependent on nest eggs built up through a lifetime of work and thrift.

This has made making ends meet a huge challenge for many, with the base interest rate now just 0.25pc.

senior economists at the International Monetary Fund warn that the era of low interest rates and quantitative easing – the printing of billions of pounds of new money – is causing great distortions in the international financial system.

It has unleashed a wave of borrowing worldwide by governments, companies and citizens. This has led to an unprecedented build-up of £120trillion of global debt, which is a huge danger to economic stability.

Given all that, the Prime Minister ought to be pushing at an open door with her desire to see better returns for savers. But the most obvious way to improve returns is to force up interest rates, and that is far from easy.

since 1997 when former Chancellor Gordon Brown gave the Bank of england operational independence, the Bank’s nine-person Monetary Policy Committee has set interest rates.

By doing so, it has taken this most sensitive issue away from the control of Downing street. By and large, that has been a good thing because when it functions properly, the Bank is robust and independent in its decisions.

It is unthinkable that the Prime Minister would seek to take these powers away – it would be giant shock to financial markets and undermine the international credibility of the British economy.

BUT that does not mean Mrs May and her Chancellor Philip hammond are powerless in the face of the Bank’s independence. It has been suggested that the Government is considering scrapping the limit on the amount savers can pay into a tax-free Isa each year.

That is encouraging, but the fact remains that returns on Isas are paltry at barely more than 1pc.

There was also talk of new governmentbacked bonds, which would give savers better returns.

In fact, with resolve and creative thinking, there are a number of steps the Government could take to improve the outlook for pensioners and savers.

The job of Ns&I is to help fund the UK government’s borrowing by offering savings products directly to consumers. Before the 2015 election, George Osborne authorised Ns&I to launch ‘pensioner bonds’, which paid 2.8pc interest over 12 months, and gave 4pc returns for three-year bonds.

This raised an immediate £10bn for the exchequer, but it produced howls of protest from banks, who could not match the returns (which were effectively a government subsidy) and from Labour, which accused Osborne of buying votes. Nevertheless, the Chancel- lor could announce in next month’s autumn statement a new series of savings bonds geared to different age groups and designed to offer savers better returns.

This would encourage people of all ages to save more and would, in effect, be reviving the concept of a national savings bank.

Infrastructure bonds would offer low interest rates stretching well into the future and provide a golden opportunity for the Government to authorise debt attached to specific projects such as hs3, the transPennine fast railway.

These bonds could be made attractive to ordinary savers, pension funds and insurance companies by offering superior returns in terms of higher interest rates than regular gilt-edged stock.

They would also give people the reassurance that they are investing in Britain’s future.

What used to be a thriving building society sector was largely demolished by the financial crisis, leaving behind a handful of large providers such as the Nationwide, and a few local and specialist societies.

To counter this, the Government could provide financial encouragement for credit unions – or financial co-operatives – to be established at the local level, with unions able to encourage deposits by offering better returns than the banks as well as small loans.

Ministers could also suspend the current round of money printing.

The Treasury is notionally in charge of quantitative easing, the technique through which the Bank of england buys bonds from banks, insurers and other firms, which means those organisations have new cash to lend or invest. This quantitative easing also has the effect of putting downward pressure on interest rates.

In the aftermath of Brexit, the Bank launched a new programme of £60bn of government bond buying, in addition to the £375bn undertaken in the wake of the financial crisis.

It also authorised the Bank to buy – in other words take on the burden of – up to £10bn of private sector debt, thus easing the strain on private firms.

Technically, the new Chancellor could halt the programme midstream. But the impact on already turbulent markets could be disruptive.

so the Government could announce that there will be no more quantitative easing beyond that which has already been authorised.

That would send a strong signal that the era of printing money was at an end and also have the effect of pushing interest rates up, simply because there would be less money in the system for banks to lend to each other.

Many financial observers argue that the money markets have become addicted to billions of pounds of quantitative easing being pumped into the system and they must be weaned off it and learn to stand on their own two feet.

The danger is that if another crisis looms into view – such as a stock market meltdown triggered by the election of Donald Trump or the collapse of a major institution such as Deutsche Bank – then the Treasury and the Bank of england, banned from printing more money, would lack the financial weapons to stabilise the market.

another reason Mrs May is right to target low interest rates is that they have been a disaster for pension savings.

Pension funds are required, for reasons of fiscal security, to keep a proportion of their holdings in bonds issued by the government.

Following the Bank of england’s decision to lower the bank rate to 0.25pc to steady the economy after Brexit and to embark on a huge new programme of printing money, the difficulties of company retirement funds have been exacerbated.

Tesco recently revealed that the deficit in its gold-plated final salary pension fund had soared from just below £2bn to £5.9bn.

PeNsIONs have suffered a double whammy. Firstly, the value of a pension fund is determined by the returns on long-term government bonds.

Low official interest rates and a sluggish global economy mean that the return on many of these bonds is now negative – so pension funds are essentially paying for the privilege of holding bonds.

This has caused pension fund deficits to soar.

secondly, those people who retire and want a steady income to see them through to the end of their lives are obliged to buy what is known as an annuity, an insurance policy that pays a regular income.

The returns on these annuities have plummeted since the peak of the crisis in 2009 when the Bank of england cut interest rates to the bone. In short, the case for delivering better returns to pensioners could not be greater.

Fears that money printing and low interest rates would cause inflation in Britain to rocket have so far been misplaced.

This is partly because commodity prices have come off the boil as a result of the reduction in demand from China. and on Britain’s high street, competition from cut-price German interlopers aldi and Lidl has kept a downward pressure on food prices.

Normally, central bankers put the brakes on rising inflation by increasing interest rates, but at the moment there is no need to do that.

This means that Mrs May’s Government, in the short term at least, cannot just wait around for inflation to increase – and will need to come up with other ways to help savers.