Mark Carney’s statement this week & the impact for savers & investors

Mark Carney’s (newly appointed Governor of the Bank of England)  statement this week has significant impact for savers and investors alike –

  • No change in interest rates likely for the next three years
  • Unemployment appears to be the target that will dictate interest rate policy
  • Are you prepared for the risks inflation will bring to your bank balance?

 

Yesterday’s statement from Mark Carney at the Bank of England is significant for all savers and investors, whether you hold gilts, equities, property or wine!

Markets have for some time been concerned over the timing of future interest rate hikes, Mr Carney has provided as promised good forward guidance suggesting we will be waiting a little while yet.  He said that interest rates will not rise until unemployment is down to 7%, a level the UK hasn’t seen since early 2009.  Mr Carney also seems to be setting a looser inflation threshold below which the Bank of England will not intervene, the Bank will not now intervene unless inflation breaches 2.5% over a two year horizon.  Some commentators are suggesting that the Bank of England will allow inflation rates above 3% as Britain attempts to inflate some of its debt away.

Savers and holders of bonds and gilts will be particularly hard hit and can expect to see the value of their holdings fall in inflation adjusted terms.  As has been the case for a couple of years, cash is very far from being king.  Even with economic growth recovering adding the best part of a million new jobs to the UK economy is likely to take upwards of three years.  Are you prepared for your savings to be costing you money over this period?

The Banks statement has significant upside for physical asset classes that act as inflation hedges, such as fine wine. If inflation stays at 2.5 – 3% over the next three years a cash holding of £10,000 will be worth just over £9,000.  If a saver has had £10,000 in the bank since the credit crisis began in 2007 by 2016 it might be worth as little as £8,300

“’Until the margin of slack within the economy has narrowed significantly, it will be appropriate to maintain the current exceptionally stimulative stance of monetary policy.’

He added that to hit the 7% threshold for unemployment, the economy would need to create 750,000 new jobs. The Bank thinks this is unlikely before 2016.”http://www.theguardian.com/business/2013/aug/07/interest-rates-remain-low-carney

The arguments for making an investment in wine have just got stronger, wine has a great history of performing well in troubled times, and as a physical good provides a great hedge against inflation.