This week marks the fifth anniversary of UK base rates being held at 0.5 per cent, unchanged since March 5 2009 and widely seen as a response to the devastating impact of the global financial crisis of 2008.
While the low base rate has provided a boom for homeowners, savers have been trapped in a nightmare – in which cash has proved the riskiest asset of all.
According to recent analysis by M&G Investments of the major asset classes in the past five years, UK equities would have provided investors with a whopping return of 99.4 per cent.
Our analysis shows that in the past five years of the ultra-low base rate, all major asset classes have provided a positive return.
However, once you strip out tax and the impact of inflation, cash produces a loss of 10.4 per cent. Crucially, this means that savers who kept their money in savings accounts, such as some offered on the high street, will be feeling the pinch a bit more than others as the true purchasing power of their money has been completely eroded.
On the flip side, savers who put money into other asset classes during that period would have seen a positive return on their investments of at least 20 per cent.
UK equities and global equities provided the highest positive return after deductions with 99.4 per cent and 69 per cent respectively.
This was followed by a 53.6 per cent return from UK corporate bonds and 20.5 per cent commercial property.
The Bank of England governor Mark Carney has publicly stated that the base rate may continue to stay low for some time to come.
The Bank of England’s Monetary Policy Committee has kept the base rate at 0.5 per cent in an effort to encourage borrowing among consumers and businesses.
However, in spite of more encouraging unemployment figures recently, which the government had previously indicated would be a forward guidance trigger, Mr Carney has said the base rate may continue to stay low for some time to come.
This comes following a recent announcement in which the Bank stated the next phase of forward guidance would include a wider range of economic indicators with the aim of absorbing spare capacity in the UK economy.
This also means that savers could continue to miss out on inflation-beating returns if they continue to keep their investments in cash or savings accounts linked to the ultra-low base rate.
A natural question for investors to ask is: “Does this mean I’m too late to buy equities?”
Our answer to that is “no”, but clearly for some investors the risk of volatility in equities will be an unpleasant side-effect.
Therefore, investors should look at all major asset classes to provide a mix of growth and protection of capital as well as a regular and growing income.
A diversified portfolio with flexible asset allocation will ensure you are invested in the right blend of assets at the right time regardless of fluctuating Bank of England base rates.