Interest rate update
Although inflationary pressures in the UK have shown signs of moderating, the rate of inflation continues to run well ahead of the Bank of England’s (BoE’s) rolling target of 2%. Consumer price inflation fell to 3.6% in January compared with 4.2% in December; although the decline was partly attributable to the fact that the rise in VAT from 17.5% to 20% – which took place in January 2011 – no longer featured in the calculation.
BoE Governor Sir Mervyn King expects inflation to continue its fall, but warned, “Growth remains weak and unemployment is high”. Prices are still rising significantly faster than average earnings and savers are suffering the long-term consequences of low interest rates. In the BoE’s most recent quarterly inflation report, King acknowledged that savers are feeling the pressure from low interest rates but added that higher rates would have an adverse effect on the UK’s feeble economic recovery.
Meanwhile, at its February meeting, the BoE’s Monetary Policy Committee voted in favour of increasing its programme of quantitative easing measures by an additional £50bn to £325bn. However, according to the National Association of Pension Funds (NAPF), annuity rates are being “squashed” by quantitative easing measures and the BoE’s actions risk leaving pensioners “out of pocket for the rest of their lives.” The NAPF urged the industry regulator to set out a strategy to help pension funds to cope with the effects of quantitative easing.Subscribe to our newsletter
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