Martin Lewis offers advice on savings and interest rates
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Interest rates have tumbled in the UK as a result of the Bank of England’s 0.1 percent Base Rate decision back in March 2020. With the central bank deciding to keep its base rate at the same level ever since, it has not provided much optimism for savers. Indeed, it has been argued that the “continual fragility” of the economy could mean interest rates remain at staggering lows for years to come, both in the UK and across the world.
A report entitled ‘Adapting to Ultra-Low Interest Rates – Thematic Research’ has analysed what lower returns could mean for banks.
The paper anticipates the impact of the COVID-19 crisis is expected to be felt for at least the next five years.
As a result, it has asserted ultra-low interest rates are likely to become the norm in this time period, with banks being forced to adapt.
However, it is undoubtedly not just the providers who would feel the effect of such a move.
Low interest rates for savers are not likely to be good news for those who wish for their funds to grow.
This is because it will take far longer for Britons to reach their financial goals and get more of a return on the cash they save.
It could even prove a disincentive for individuals to save money, and turn people off the idea of banks.
However, it must be acknowledged formal saving has other benefits aside from interest rate growth.
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Many providers offer protection under the Financial Services Compensation Scheme (FSCS) which is a key benefit.
This means that should the worst happen, funds up to £85,000 are protected.
Regardless of this, though, a low interest rate environment is likely to encourage spending over saving.
While this could offer a well-needed boost to the economy, it is not a win-win situation, and savers could be left feeling disheartened.
Mohammed Hasan, Banking Analyst at GlobalData, looked further into the matter which is likely to impact UK banks and those overseas.
He said: “Banks that have made efforts to reduce the proportion of net interest income that makes up their bottom line, as well as reducing their cost to income ration are best placed to succeed over the next decade.
“COVID-19 has enabled many banks to close the gap between them and competitors, who were further ahead in adapting to the macroeconomic climate.
“Banks of all size have been able to close inefficient branch network and move towards streamlined digital operating models.”
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Mr Hasan highlighted a number of banks across the world which have proven themselves as adaptable in this way.
However, he also looked at financial providers which are at risk in this way, and many are closer to home.
Nationwide in the UK, and Permanent TSB in Ireland were identified as providers which have “undiversified streams of revenue”.
Mr Hasan concluded: “As technology companies move further into financial services and banking it remains to be seen how well banks can move in the other direction and capture value from e-commerce, social media, data analysis, and business services.”
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