Morning Line: interest rate rise or not, savers are unlikely to benefit

Not everybody believes the latest GDP figures however.  The construction industry was supposed to have increased by 6.6% compared with the first quarter, accounting for more than one-third of the total increase in GDP. ‘We are not convinced the rebound in this area of the economy has been anywhere near as robust as implied by this data,’ said Simon Rubinsohn economist at the Royal Institution of Chartered Surveyors. 

He believes that the strong GDP figures may strengthen the argument for base rate increases at the next Monetary Policy Committee meeting. ‘We are unconvinced of the merits for such a move, despite the robust second quarter data and believe this will mark the high water mark for quarterly growth in the economy with fiscal tightening set to bite as the year draws to a close.’

Savers suffer 

What does all this mean for homebuyers, and savers?  Whether interest rates remain at 0.5% or rise, it is unlikely that savers will benefit.  The banks and mortgage lenders will take the opportunity of any rate rise to improve their margins and will put up mortgage rates but probably leave savings rates where they are for as long as they can get away with it.

In addition there are some of us who believe that the government intends to inflate its way out of trouble and won’t increase interest rates until it absolutely has to.  It is no accident that National Savings & Investment Index Linked Savings Certificates – the one investment for small savers which showed a real rate of return after taking into account inflation – were withdrawn last week.   The government also recently announced a switch to the generally lower CPI as the official measure of inflation for pensions rather than RPI.

Whether you are in the ‘inflation’ or ‘deflation’ camp, it looks as though we are in for a bout of ‘stagflation’ – a stagnant economy, higher unemployment, a decrease in disposable incomes and rising prices.  The increase in VAT to 20% in January of next year will ensure that prices continue to move up..  The Bank of England could easily curb inflation – if it wanted to – by putting up interest rates.  But it chooses not to do so.  Bad news for savers I’m afraid.