Interest rates for charities are dependent upon economic growth
Sarah Cotton, Client Executive, Schroders Charities
Low interest rates and QE (Quantitative Easing - the process that has led to the government buying a significant proportion of the gilt market) that have been in existence since the credit crunch were intended to boost lending and stimulate economic growth. As a consequence, base rates have been forced down and have remained at their current level of 0.5% for over four years.
The “Funding for Lending” scheme, launched in July 2012, was designed to encourage banks to increase lending to small and medium enterprises (SME’s) and prop up the mortgage market, thereby prompting a meaningful improvement in the country’s economic growth. Whilst it is true that mortgage rates are currently at an all-time low and in recent months lending in this sector has indeed ticked up, the volume of lending remains relatively low. It has also not produced the hoped for economic stimulus. This has served to keep interest rates at record level lows, meaning that savers, pensioners and charities relying upon the income from cash deposits have been particularly hard hit.
Mark Carney’s comments after his first Monetary Policy Committee meeting intimated that interest rates would remain low until there are indications of an economic recovery. He also suggested that both the rise in money-market rates and recent upsurge in swap market yields were not warranted. These have since fallen back, however demonstrate the challenge of accurately predicting when, and by what magnitude interest rates will rise. Swap markets may help to predict trends, though should be regarded as a predictor of change in sentiment rather than a forecast for rate increases.
Carney appears to prefer a policy biased towards generating growth rather than targeting inflation and has indicated that any decision to increase rates and halt QE is dependent upon the pace of economic growth and recovery in the UK. Loose monetary policy combined with the possibility of further QE suggests that low rates are set to continue and unfortunately for savers, a rise in yields in the near future does not seem likely.
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