The effect of the interest rate decision on savers

The effect of the interest rate decision on savers

At the beginning of October, the Bank of England's Monetary Policy Committee (MPC) decided to hold the base rate of interest at 0.5 per cent for the 32nd consecutive month, with concerns over the UK's economic recovery and high inflation driving the decision. So, what does this mean for savers?

We all know that borrowers in the current climate are doing well, as interest rates have fallen substantially; however, savers are certainly feeling the pinch when they look at the returns being generated by their investments.

It is important to understand just why the MPC's monthly decisions are so important to the banking sector - and how this then has an impact on the rates offered on the high street.

All the financial institutions in the UK borrow from the Bank of England and the base level of interest set by the MPC is the rate at which this money is lent. As a result, this then has a knock-on effect on the rates customers are offered by their banks.

One of the reasons that the committee has kept rates so low for so long is in a bid to stimulate spending, as greater activity among consumers will help the wider economy get back on its feet.

If you have a large amount invested in savings accounts - or you rely on the income from your nest egg to support your lifestyle - a low-interest environment is bad news.

Martin Bamford, a chartered financial planner at Informed Choice, explained that savers have two main options at the moment. "They can either leave their money in cash and suffer capital erosion, or expose their money to greater levels of risk in order to get the prospect for better returns," he explained.

He stressed that those who are averse to risk need to shop around to ensure they choose an account that offers the best possible rates of interest.

So, is now the time to start looking to offshore banks in a bid to find a better return for your money?

The difference in interest rates between offshore accounts and those found on the UK's high street has become eroded over the years, although international financial services organisations often provide competitive rates.

Yvonne Goodwin, from Yvonne Goodwin Wealth Management, stressed that any savers looking at offshore accounts need to make sure that the bank they are planning to deposit their money with is in a stable jurisdiction.

The Isle of Man, for example, is one offshore jurisdiction that may appeal and as it has a strong banking system, tight regulations and an AAA credit rating, it could be a safe choice - particularly given the economic turmoil being experienced across much of the rest of Europe.

Ms Goodwin added that people moving overseas for either work or retirement may find it "useful to hold accounts in another country or another currency". Using online banking to access your accounts can make it easy to manage your money from anywhere in the world, including enabling you to transfer funds from offshore savings accounts to current accounts.

This flexibility and the range of savings products on offer through international banks could encourage more British savers to look at the possibility of shifting some of their money offshore.

Instant access and fixed-term accounts are available, providing plenty of options for those who are keen to grow their savings despite the low-interest environment in the UK.

Mr Bamford predicted that the Bank of England is unlikely to increase rates before 2013, so savers may want to act now to boost their funds, as there doesn't appear to be any prospect of a rise in the UK's base rate of interest just around the corner.