Tag Archive | "Bank of England"

Inflation hits ZERO; NS&I to Drop Easy Access ISA Rate


There is a downside to the Bank of England setting their base rate so low for so long. When it’s next-to-nothing and the financial markets get used to it, it triggers trends. It’s those trends we see across the spectrum of the financial sector, reflecting that the 0.5% base lending rate has been with us now for above six and a half years.

Whilst it’s great for borrowers, it’s dismal for savers. Throw in an inflation rate of 0% (as the markets reported yesterday) and money in the bank is worth exactly what it says on your passbook. If you’ve £10 in a savings account today, unless the markets change dramatically, after tax it’ll be worth little more than a tenner this time next year.

One of the last bastions of upholding a semi-decent interest rate, NS&I, has dealt savers a “bitter blow”. From the middle of November, its ISAs will only offer 1.25% interest, a drop of a quarter of one percent.

ISAs are still here, but for limited dividends only

ISAs have long been a traditional savings mechanism for contractors, in particular for the dividend investment that these savings accounts accommodate. In an attempt to get more of the general public saving, the government opened up the full extent of ISAs to cash savers, too.

Prior to this change, the most anyone could deposit in cash was 50% of your total ISA allowance. For 2015/16, the maximum tax-free annual deposit into an ISA account is £15,240.

When you open your account, you can choose all cash, all dividend or the original half-and-half. So even after amendments, contractors still have a safe haven for their company dividends if they choose wisely from the outset.

However, the latest drop in easy-access ISA interest rates will do little to encourage the saving the government envisaged upon making all-cash ISAs available.

Would a raise in the BoE base rate help?

Just as it takes a while for banks and lenders to drop their rates in line with the BoE, the same is true for the knock-on effect of any increases.

Mark Carney, the Bank of England governor, has hinted that the base rate will rise sooner rather than later. But with each month that passes, pundits release bated breath as the Monetary Policy Committee confirms it’s sticking to its guns.

But the MPC’s decision may change after the next meeting. The Retail Price Index, upon which inflation is based, dropped by 0.1% in August (predominantly fuelled by fuel) to a flatline zero.

What does that mean? In theory, it means that if a bottle of milk cost you £1.25 in August last year, it still cost you £1.25 this August, too.

The BoE may well have been waiting for inflation to drop back to this point (or perhaps even see if it turns negative) before changing the base rate. But even if we get the long-awaited rise, don’t expect to see your savings interest rates rise any time soon.

Banks will not giveth before they receiveth

Before giving anything back, the banks will increase mortgage interest rates to get a positive cashflow, first. Only when those rates settle will savers see the benefit of a BoE rise in interest rates.

The savvy among you will have a lightbulb above your head right about now. That’s because another favourite savings mechanism for many contractors is investing in Buy-To-Let mortgages. If you feel your ISA isn’t performing as well it ought, perhaps a brick and mortar investment may offer a sounder platform for your future.

But don’t hang about for too long. Like I say, all lenders are watching Carney and Co. As soon as the base rate rises, so will mortgage interest rates. On your marks…

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High street banks are frightening off small businesses


A lot of small businesses and accountants for contractors are too scared to approach their bank for a loan and instead they are hoarding money that could be put to use growing their business, according to a new report from the Bank of England.

The BoE study found that small firms are worried in case their bank cuts their overdraft facility and are sitting on reserves. Entrepreneurs worry that asking for a loan will mean their existing borrowings will be reviewed and their overdraft may be withdrawn. Experts said the results show that small companies are still suffering financial nightmares more than four years after the start of the recession.

Lending is not so much of an issue for larger organisations, but start-ups and small businesses are still finding it difficult to access credit. And the study shows that if they manage to secure a loan they face elevated fees and a long drawn out application process.

Another survey, this time from Syscap, found that 75% of SMEs think the lending margins charged on loans are too high.

Only 8% of the respondents to the Syscap survey said it was now easier for them to access a bank loan. 33% said the situation had got worse over the last year and another 12% said it had worsened in the last three months.

50% of small business owners use credit cards, personal loans or savings to fund their business, rather than approaching their bank for help. Of the firms which have asked for finance from their bank in the last 12 months, more than 33% were refused first time around.

The high street banks say they accept around 80% of applications from SMEs but this figure does not take into consideration the large amount that are put off applying.

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Will the base rate remain at 0.5% for the rest of 2011?


Savers and online accountants who have been hoping to see the Bank of England’s MPC raise interest rates sooner rather than later will be dismayed to learn that the Institute of Directors has said there is no case for rates to rise this year.

It said that it would be an unprecedented move to raise rates when the broad money supply was not experiencing double digit growth. Furthermore, a rise now could plunge the UK back into recession.

The BCC and the CBI both supported the decision to keep the base rate at its historic low 0.5% at the last MPC meeting.

David Kern, the BCC’s chief economist, said the MPC was right to keep the base rate down in order to help the fragile economic recovery and relieve some of the pressures both individuals and businesses are currently facing.

He went on to point out that the MPC is concerned about the current high rate of inflation and the prospect that it may rise further in coming months. However, it would be a major mistake to tighten policy at this stage. Increasing the base rate prematurely could damage economic growth and lead to more redundancies.

He added that the MPC could consider increasing the quantitative easing programme if the economy were to weaken any further.

The CBI’s chief economic adviser, Ian McCafferty, said the MPC was in a difficult position and will have to draw a fine balance over the coming months. However, he feels that if inflation reaches 5% by the autumn, the MPC might consider a change of policy before the year ends.

© 2011 All rights reserved. Reproduction in whole or in part without permission is prohibited.

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Choppy recovery but little risk of a further credit crunch


The August Inflation Report from the Bank of England, which was published yesterday, was not as optimistic as contractor accountants might have hoped.

Mervyn King, the Governor of the Bank of England, warned that the economy faces a choppy recovery over the next couple of years. The Bank has said they expect inflation will remain higher for longer than they had previously anticipated and this has led to a lowering of the economic growth forecast. The report also suggests that interest rates will remain at their historic low in the immediate future.

Previously, the Bank had expected to see growth of around 3.4% in 2011 but this has now been revised to around 2.5%. The main reason for the revision is the coalition’s decision to increase the VAT rate to 20% as from the beginning of next year.

Mr King pointed out that the continuing economic stimulus measures along with the drop in value of the pound were helping the economy to expand but this is being offset by the lack of lending from the banks, something that affects contractors.

However, King did stress that the cost cutting plans put in place by the government have reduced the risk of a double dip recession.

Economists were quick to comment with some saying the report was more ‘dovish’ than had been anticipated. Howard Archer, from IHS Global Insight, said the report reinforced their view that interest rates will remain at 0.5% until early in 2011. He forecasts that we will not the first rise in rates will until the summer next year.

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Online accountants in for a rocky ride


Contractor accountants should take note that the CBI warned recently that although the economy has been showing signs of improvement, challenges and uncertainty still lie ahead.

The comment came after the Bank of England decided to maintain the historically low interest rates at 0.5% last week.

The head of economic analysis at the CBI, Lai Wah Co, said that although the move was widely expected, there is growing disparity amongst members of the Monetary Policy Committee over the strength of the economic recovery.

GDP has increased by 1.1% in the past three months according to government figures but this is expected to slow down during the second half of 2010. The recovery is being supported by an exceptionally loose monetary policy and it may be sensible to move towards gradually withdrawing this monetary stimulus, the CBI expert remarked.

Meanwhile, the majority of the UK’s small businesses and limited company contractors have still not returned to pre-recession levels of profitability. 70% of British entrepreneurs have not seen their profits return to normal after the credit crisis, according to RSM Tenon’s Business Barometer.

9% of entrepreneurs believe they will have to wait for at least another 3 years before their business returns to normal, 20% think between 2 and 3 years and 27% say 1 to 2 years.

Over 40% of entrepreneurs have had to review their business through fears of a double dip recession and 22% think that a lack of cash flow could seriously threaten their operation in the coming 12 months.

The head of recovery at RSM Tenon said that they are expecting to see corporate insolvency levels remaining the same as over the past two years as business owners still struggle to secure additional funding.

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