Bank of England Base Rate reduction and cash as an asset going forward
Here Phil Hart, chartered financial planner at Cowgills Wealth takes a look at what the reduced Bank of England Base Rate impact is on the markets as a result of COVID-19.
Alongside the recent fiscal stimulus packages put in place by the UK government, the Bank of England reduced their Base Rate to a historic low of 0.1% in order to create an environment for even cheaper lending for businesses and banks. This move has been echoed across the globe and has become the expected tool to be used when recession is upon us.
The long term effect of this cut will be seen in time and will be mixed in with the expenditure by the UK Government, spending generally and the effect COVID-19 will have on business recuperation over the immediate and long term period once restrictions start to be lifted. Certain economists are predicting inflation increases due to stimulus, which would usually lead to rate increases but the past 10 years has shown the reluctance to increase rates. Future GDP growth will be a significant factor in this.
At any rate, we are left with cash rates that are even lower in terms of their returns than before and this is unlikely to change any time soon. A return to 5% savings rates seems further away than ever. CPI Inflation has just come in at 1.5% and even if we assume this will fall in the near term, the target for inflation is still 2%. Obtaining even close this as a savings rate is very difficult unless you are willing to tie cash up for many years. Cash will guarantee a loss in real value for the foreseeable future.
Cash has provided a buffer recently as world markets have felt the effect of COVID-19 and those who have held cash long term would looked at recent events as a confirmation that cash is best. But for those who are long term savers and investors, we should look at the impact this change will have and think about our positioning where cash is concerned.
A simple illustration is below. It shows what the average cautious/balanced portfolio has returned over the period from around the height of the markets before the financial crisis started (01/07/2007) to 23/04/2020:
As you can see, the average portfolio has outperformed inflation, even with two significant market corrections, by over 17%. Cash, represented here by a 90 day notice account index, lags behind both by some margin. So, for those who look long term and are able withstand and are tolerant to seeing fluctuations in capital values, investing has provided significantly better returns and the long term economic consensus is that this will continue to be the case. With markets lower and rates set to remain low, it might be argued that now represents a better time than most to look at avenues other than cash for long term capital.
The value of investments can fall as well as rise. You may not get back what you invest.
Past performance is not a reliable indicator of future results.