The four-year anniversary of the last cut in UK base rates passed on March 5 2009. It was then that the Bank of England (BoE) cut rates to a new record low of 0.5 per cent.
Until 2009, in more than 300 years of history encompassing the rise and fall of the British Empire and two world wars, interest rates had never fallen below 2 per cent.
Yet in the depths of the global financial crisis, and in the aftermath of RBS and Lloyds/HBOS being part nationalised, the BoE cut rates to a record low in order to offer support to an ailing economy.
Four years on, base rates remain at 0.5 per cent and look likely to remain there for some time yet, particularly given the BoE’s focus on stimulus via quantitative easing (QE) and seeming reluctance to aggressively target inflation, which remains considerably above the 2 per cent target.
This is an interest rate environment without precedent and forms an interesting backdrop for investors.
The ‘hunt for yield’ has been well documented and it is clear that investors seeking real returns have had to move up the risk spectrum.
With QE and risk aversion pushing government bond yields to record lows, ‘safe haven’ assets offering a real return have been increasingly hard to come by.
In this era of so-called financial repression it is clear that savers and investors have to take risks or suffer an erosion of their wealth. Whether that erosion is overt, such as was proposed in Cyprus, or covert, such as in the UK with our negative real interest rates, the outcome is the same.
The protests against the proposed levy on bank accounts in Cyprus last month grabbed the headlines. For the vast majority of savers (those with under €100,000/£85,200) the levy was, under initial plans since revised, set to be a one-off 6.75 per cent, offset by being given shares in the bank and a potential share of the revenues from the Cypriot gas deposits. Now only depositors with more than €100,000 will be affected.
This contrasts with the UK, where bank accounts generally pay no interest and anyone with their cash sat in the bank continues to see their cash eroded by inflation. £100 put in the bank in 2009 is now worth £87.50 – a worse haircut than seen in Cyprus. Yet because there is no overt levy as such, people are not out on the streets.
It may seem harsh but the deal on the table in Cyprus could end up looking quite reasonable in hindsight.
The era of deleveraging we live in will continue for some time and this means investors and savers will continue having to seek out yield given the returns on the perceived safest asset of them all – cash – are likely to be negative in real terms for some time.
Cyprus represents less than 0.5 per cent of eurozone GDP but the precedent this sets and the damage it does to people’s confidence in the safety of their cash in the bank will be hard to undo.
Gary Potter is co-head of multi-manager at F&C Investments
