THE IMPLICATIONS OF THE BANK OF ENGLAND’S INTEREST RATE CUT & HOW TO GENERATE INCOME IN A LOW INTEREST RATE ENVIRONMENT

Key points covered:

  • BOE is sending a strong signal that it will act to support sentiment and activity.
  • Low interest rate good for borrowers
  • Support for banks to encourage them to lend
  • Alternate sources of income
  • Rates could be lower for longer

Why is this being considered?

Michelle McGrade, chief investment officer at TD Direct Investing comments on what this means for investors:

“The Bank of England has cut interest rates to 0.25%, the first rate change in seven years, dealing a blow to savers, in the hope of creating spending impetus for the economy.”

“Although the markets had mostly priced in a cut, we must recognise that the issue that’s affecting people’s confidence is what leaving the EU means. The sooner the Government can give us clarity on that the better.

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“While savers have taken a hit today, investors are likely to benefit. With such low rates on deposit accounts, traditional savers could turn to shares to earn a decent level of return. This, in turn, drives share, bond and asset prices higher, helping the FTSE to perform well during a period of low interest rates.”

The ripple effects of an interest rate cut on savings & pensions

The impact of a rate cut has already been felt in the currency markets, where sterling is vulnerable and has already fallen vs the US Dollar this year. Market sentiment could take it in either direction. However, at current levels lower interest rates can potentially serve as a positive factor for exporters and those with significant overseas earnings such as the oil and mining sectors and luxury goods manufacturers, giving traders and investors additional opportunities to consider. Around 70% of FTSE 100 revenues are derived from abroad.

Savers

With interest rates now  at record lows, savers have been getting very little return from holding cash. Those looking to save might benefit from alternate sources of income, such as equities, corporate and high yield bonds, infrastructure and emerging market bonds. Two articles on alternate sources of income:

Alternate sources of income: Infrastructure

Alternate sources of income: High Yield

Pensions

Anyone looking to secure an income for retirement will already be impacted by lowering annuity rates as a result of gilt yields plummeting following the Brexit vote. Already annuity rates have fallen in the region of 3 to 3.5%. Lower interest rates are likely to drive yields lower still. If you don’t need to take your pension then it’s probably best to sit tight but if you do it’s important to understand that the rates you get now are locked in for retirement, so it’s important to shop around for the best rate available. Another option would perhaps be to consider a mix of Income Drawdown (taking funds directly from your pension pot) and an annuity to give you a blend of security and income flexibility. Read more about what Brexit could mean for your pension.

What next?

People have been talking about “lower for longer” for interest rates for some time. Now it looks like they will be even lower for even longer, with few predicting any rise before 2020. The BoE also forecasted lower GDP growth for 2017 but a recovery the following year. The BoE will hope the government will provide further stimulus because  it is starting to run out of ammunition. However, anything can happen with the unprecedented political upheaval that we are seeing and with Theresa May at the helm, we expect that there could yet be more left field change.

https://www.tddirectinvesting.co.uk

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