Interest Rate Update
BoE Governor Sir Mervyn King expects inflation to continue its fall, but warned, “Growth remains weak and unemployment is high”. Looking ahead, the rate of inflation is expected to decline to 1.8% by 2013. The BoE expects a “zigzag pattern of alternating positive and negative quarterly growth rates” during 2012, and King warned that the UK’s fiscal consolidation and tight domestic credit conditions, allied with weakness amongst major overseas trading partners, are “acting as a drag on growth”.
Prices are still rising significantly faster than average earnings and savers – particularly pensioners – are suffering the long-term consequences of low interest rates. In the BoE’s most recent quarterly inflation report, King acknowledged that savers are feeling the pressure from low interest rates but added that higher rates would have an adverse effect on the UK’s feeble economic recovery.
Meanwhile, at its February meeting, seven of the nine members of the BoE’s Monetary Policy Committee (MPC) voted in favour of increasing its programme of quantitative easing measures by an additional £50bn to £325bn. However, the National Association of Pension Funds (NAPF) highlighted the negative implications for pensions, commenting, “This short-term stimulus is leaving pensioners and pension funds in long-term pain.”
According to the organisation, annuity rates are being “squashed” by quantitative easing measures, retirees are receiving a lower pension than they expected, and the BoE’s actions risk leaving pensioners “out of pocket for the rest of their lives.” The NAPF also pointed to the problems faced by companies that run final salary pension schemes: as quantitative easing puts additional pressure on their pension funds, firms will have to spend more money on their pension schemes, increasing the risk that companies will simply decide to close their final salary pension schemes.
The NAPF urged the industry regulator to set out a strategy to help pension funds to cope with the effects of quantitative easing and suggested measures such as extending recovery periods, smoothing valuation results and postponing valuation dates.
The contents of this article should not be construed as advice and do not necessarily reflect our views. Independent Financial Advice should always be attained in order to assess your own individual circumstances.