Cash values would fall even faster in real terms if inflation shot past 4 or 5 percent, especially since the Bank of England will be reluctant to s
Cash values would fall even faster in real terms if inflation shot past 4 or 5 percent, especially since the Bank of England will be reluctant to slow the post-Covid recovery by increasing base rates. Inflation is reviving as central bankers and governments flood the global economy with stimulus, with US President Joe Biden lining up a further $1.9trillion of coronavirus relief. Willis Owen head of personal investing Adrian Lowcock said once lockdowns are eased and people start spending, inflation could spike.
High-flying US tech stocks such as Tesla have fallen as investors become more cautious, but Lowcock said: “Central banks are unlikely to hike interest rates substantially.” This should protect stock markets but would spell disaster for retired savers living off the interest on cash.
High inflation and low interest rates would be the worst possible combination, warned Kevin Mountford, founder of savings platform Raisin: “It would mean savers get a near-zero return, while higher inflation would eat away at the real value of their money.”
This makes it more important than ever to shop around and get the maximum interest rate, Mountford said.
An inflationary surge would also be a blow for retired investors living off the income from low-risk government and corporate bonds.
Bonds pay a fixed rate of interest, which is less attractive when prices are rising, and inflation fears triggered a bond market sell-off in recent weeks.
Prices on UK government bonds, known as gilts, fell 7.3 percent last week, yet 10-year gilts yield remain rock bottom at just 0.86 percent. Rupert Thompson, chief investment officer at Kingswood, said: “Far from offering risk-free returns, bonds now just offer return-free risks.”
He expects bond prices to fall further as inflation increases, driven by the economic recovery and rebound in oil prices.
If the Bank of England holds base rates to protect the economy that would benefit mortgage borrowers.
Laith Khalaf, AJ Bell’s financial analyst, said the Government is unlikely to let house prices crash as it continues to throw fuel on the fire of a booming property market, with Chancellor Rishi Sunak expected to extend the stamp duty holiday and announce further support for first-time buyers in today’s Budget.
“As soon as the flames start to subside a bit, another bucketful gets chucked on. It’s obviously tougher for savers,” he said.
Lowcock said the one positive for savers is that inflation would head off the threat of negative interest rates.