UK inflation to remain above target well into 2011 delivers fresh blow to investors and savers

News - Savings

Written by Ray Clancy

Savers and investors are unlikely to take much cheer from the latest Bank of England inflation report which says the outlook for British economic growth remains highly uncertain and the recovery depends heavily on developments in the rest of the world.

In its quarterly report the banks predicts that inflation is likely to remain high well into next year, remaining above its 2% target rate at least until the end of 2011.

With current inflation rates at 3.1%, basic rate taxpayers would need to secure an interest rate of 3.8% on their savings to mitigate the effects of inflation. This figure rises to 5.17% for higher tax payers and to 6.21% for those paying 50% tax, according to Kevin Mountford, head of banking at moneysupermarket.com.

‘This poor return of savings coupled with rising living costs means people need to ensure they are doing everything in their power to maximise the value generated from their finances and lessen the impact of the harsh economic climate. Whilst it’s clearly important for consumers to ensure they secure the best possible savings rate available, the majority of people will have to look beyond their savings to ensure they are beating the squeeze on their wallets,’ he said.

‘Consumers are understandably worried about money at the moment, but there are ways in which they can make their money go further and free up some cash to help alleviate any financial pressure. Taking some time out to review all of your outgoings can really pay dividends, and switching deals to save money is a no brainer when times are tough,’ he explained.

‘For example, switching mortgages to a fixed rate deal would protect against interest rate rises and tackling expensive credit card debt could make considerable savings. Ultimately in this bleak economic climate, consumers need to be savvier about how they spend, save and borrow money, and become their own chancellor,’ Mountford added.

The news is having a positive effect, however, on Sterling which rose to a six week high against the Euro on Thursday, extending gains from the previous day after the Bank of England’s inflation report.

It makes it less likely that the UK will follow the US by introducing a second round of quantitative easing, according to Andy Scott, Foreign Exchange Dealer at HiFX. ‘The minutes from the meeting this month will provide further insight into the discussions. There could still be a surprise if any of the other committee members voted for a change in policy. But for now at least, it doesn’t look like the bank will be firing up the printing presses anytime soon, he said.