We need a post-Brexit economic hero. It won’t be Mark Carney

Iona Bain

We’re all holding out for a hero, ala Bonnie Tyler. And that hero actually takes the unlikely form of our softly spoken governor of the Bank of England, Mark Carney (who some believe looks like George Clooney, but I think they might need to go to Specsavers).

The reason why everybody, young and old, is counting on this geezer right now (even if they don’t realise it) is because post-Brexit, the Bank of England took the unprecedented decision to reduce its base rate even further, to 0.25 per cent. What does this mean?

The banks continue to slash their savings rates, meaning that the younger generations have to ask their parents and grandparents what it was like to live in an era with interest rates of 5 – 10 per cent, like they’d ask them about “the war” and the fall of the Berlin Wall.

So few of us can really benefit from the magic of compound interest, we’re dis-incentivised to put money away for the future and two dangers are liable to emerge; we either live recklessly for today on credit or invest recklessly in assets that we don’t fully understand (see my report on Monday) in the absence of any real financial education or advice.

So we might not be thinking very much about Mark Carney and his merry band of men (ala the members of Monetary Policy Committee) but their actions hugely influence the nation’s financial behaviour. And we’re all relying on these guys to make the right calls about interest rates to benefit us in the long-term, balancing as best as they can the needs of both borrowers and savers.

Here are the facts. Inflation is now running at 2.3 per cent – that’s above the BOE’s own threshold of 2 per cent needed to trigger a decision about raising interest rates. Inflation remained steady last month compared to February but experts say it was all down to the timing of Easter, and that inflation is almost guaranteed to go higher (possibly to 3 per cent, if not higher).

Higher inflation = higher cost of goods for everyone. Not good. In theory, raising interest rates should temper inflation – but there are no signs (yet) that MC et al will go down this route. Why?

The MPC will ask; could higher prices could lead to people successfully negotiating their higher wage packets to compensate? And the answer from most would be; errr…probably not.

So higher prices plus stagnant wages = possible deflation. When people feel their incomes hit, they reign in their spending sprees and economic deterioration commences. So some have speculated that the bank will wait for this chain reaction to occur, bringing inflation down of its own accord without the need to bump up interest rates.

The only fly in the ointment? The price of sterling. If it sinks much further, it will raise the cost of imports and push inflation even higher. Larry Elliot, economics editor at the Guardian recently wrote;

If the MPC sat tight under those circumstances, the financial markets might decide that the pound was a one-way bet and carry on selling.

That would be the nightmare scenario for the Bank. Rising inflation would intensify the deflationary squeeze on living standards but make it nigh-on impossible to ignore the case for an interest rate rise that would risk tipping the economy into outright recession.

So Mr Elliot has what critics might call a conspiracy theory and what supporters might call a canny prediction. He thinks members of the MPC will bang on about how important it is to hit the inflation target, with some of them voting for a rate rise to make markets THINK that they should support the pound in anticipation of higher borrowing costs. (Yes I know, economic policy really can seem more tricksy and deceptive than a Derren Brown show.)

I want to believe that the MPC will see sense and realise that, while raising the cost of borrowing will hit those who haven’t yet paid back their debts, the continued depression of interest rates is an unnecessary blow to people already trying to fight inflation. Research from Zurich shows more than a third of savers don’t have a clue about how to combat this money shrinker.

Zurich’s Alisdair Wilson said:

A gap in consumer awareness over how they can protect their savings from inflation could mean many people will see their wealth simply drain away.

We’ve got plenty of suggestions on the Young Money Blog that will help you in this battle. But one of them is definitely not “rely on the Bank of England to make things good”.

Here are three tips to help you on your way;

  1. Shop smartly – make sure you are doing research before making a purchase and see whether there are any discount codes available
  2. Consider investing in stocks and shares ISA rather than a Cash ISA, especially if you don’t need to access the money in the short term. Even though there is higher risk, the potential returns are much higher
  3. Don’t forget to top up your workplace pension – not only do you potentially benefit from matched employer contributions, you receive tax relief and are better placed to protect your savings from short term market fluctuations.

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