• The Bank of England has left base rate unchanged at 0.1%
• Markets are still pricing in a one in four chance of a rate cut next year
• A disorderly Brexit will increase that chance
Laith Khalaf, financial analyst, AJ Bell:
“The Bank of England won’t make its next move until it knows which way Brexit is heading. In the event of no-deal, it would likely be willing to look through the temporary jump in inflation as a result of weaker sterling and the imposition of tariffs, but it couldn’t turn a blind eye to the economic impact of a disorderly Brexit.
“The Bank’s governor has said no deal would have a greater long-term economic effect than the pandemic, so we can expect further stimulus should Brexit talks fail, either in the form of more QE, or interest rate cuts. On the latter, the Bank is already flirting with its effective lower bound, and there has been a chorus of groans from high street banks about the prospect of negative rates.
“Of course, aside from Brexit there is the ongoing economic damage of the pandemic to consider and that in itself may prove worthy of further stimulus. Despite the boost in confidence provided by vaccines, markets are pricing in a one in four chance of a rate cut in 2021, which would leave rates at zero, or below.
“For savers, a further interest rate cut would mean little more than rearranging the deckchairs on the Titanic. Real returns on cash have been sunk by over a decade of ultra-loose monetary policy and a record £215 billion now sits in bank accounts paying zero rate of interest. One saving grace is that inflation is so low, but that won’t be the case for ever. When the oil price crash and temporary cut to VAT for hospitality businesses fall out of the annual comparison in spring, we can expect CPI to rise back towards the 2% target.
“Whether or not the Bank chooses to cut rates in 2021 or not, the outlook for cash doesn’t alter that significantly. Almost 12 years on from bank rate being cut to the emergency level of 0.5%, we’re still stuck in the lower for longer doldrums. Savers will struggle to get a real return on money in the bank, and yet around £150 billion has been squirreled away into cash products over the course of 2020. While there’s little other option for rainy day funds, savers should consider moving longer term money out of cash and into more productive assets.”
