Cash is king as rates rise
It’s an old joke that if you ask two economists about the future you’ll get three opinions. So it was a surprise that every single one polled in early November predicted that the Bank of England would raise interest rates last Thursday (9 November). The Old Lady of Threadneedle Street – or the Monetary Policy Committee as it is properly called – duly obliged, raising the Bank’s base rate to 5%, the highest it had been since August 2001. But then it was business as normal. A poll of the same economists about another rise in the New Year found roughly a third saying one in February, a third saying no more in 2007 and a third saying the next move would be down. So some of them will be feeling very smug a year from now. And the rest will just shrug and quote the physicist Niels Bohr "Prediction is very difficult. Especially if it is about the future."
One thing they do agree on is that we have emerged from the panic that followed the attacks on the United States in September 2001 when rates across the world were slashed – to 1% in the case of the USA. Now we are back to normal times when we can expect rates in the UK to be between 5% and 6% - where they began in 1694 when the Bank of England was founded.
A rate change is of course a major opportunity for the banks to make money. Mortgage rates rise swiftly and sometimes slightly more than the base rate. Interest paid on our savings takes a bit longer to go up, and sometimes by not quite as much. So now is the time for all of us to check how much our cash savings are earning. Between us we have almost one trillion pounds stashed in cash – that’s a thousand billion or a million million pounds – and if your money is earning less than 5.25% you should move it. You can get more. As I write there is 5.45% with no strings (you do need £250) from Icesave, run by Landsbanki from Iceland. On a cash ISA you can get 5.55% with National Savings & Investments – but you cannot transfer money from another ISA, you need £1000 to invest and the rate may fall in April 2008.
These ‘buts’ are the problem with the savings industry. The top five ISA rates all have ‘buts’ attached. Either you have to give notice to get your money, or you need a lot of cash to start it, or you cannot transfer, or there is an introductory rate to tempt you in and then disappoint you later when it is cut. What we desperately need is a simplification of the savings industry so banks offer us an interest rate which is not a ‘special’ rate for six months and is above the base rate, on an account where you can put in £1 or £100,000 and can take money out and in without restrictions. A few do it and most of those are owned by foreign banks. I wonder why?
Paul Lewis
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