Investors forced into new direction from interest rate cut

The Bank of England's interest rate cut could leave investors looking over their shoulders finding new places to put their cash.

The fall in rates comes after severe volatility on the stock markets.

Edward Menashy, chief economist at stock brokers Charles Stanley, explained as interest rates have been falling the investors have been pushed towards government bonds, or Gilts.

"According to the Bank of England, there is a one in five chance of the UK economy going into deflation which would be a boon for bonds and anathema for equities," Mr Menashy said.

“Gilts, on the other hand, offer complete safety yet the gilt market at the short end is now heavily over-bought.

"The gigantic global monetary stimulus can be expected to avoid deflation and, unless handled carefully, could easily lead to hyperinflation, the great enemy of the bond market.”

He added: “We are watching the bond market very carefully as the government will have to issue a large amount of stock to finance its borrowing requirement."

However, although, despite the UK government never reneging on its debts, the cost of insurance on government bonds through credit default swaps – a key measure of risk - is now higher than for some companies.

David Kuo, head of personal finance at Fool.co.uk, said: "It is vital at this time to ensure that any savings you have are properly invested.

"Ironically, the stock market is always thought of as being risky. But when the risk associated with insuring UK government debt is higher than debt issued by a chocolate maker, then it's time to re-think where you want to keep your money."