Message Received Loud & Clear

 

All the talk of the Bank of England, Mark Carney, macroeconomics, interest rates, et al over the last few weeks means little to the masses until it is delivered in a medium and message that actually matters to them.

 

Enter Santander and their 1-2-3 account.

 

The 1-2-3 account heavily marketed by Santander is a juggernaut in the bank savings world as the interest rate has been market leading for years. However, it announced this week that it is cutting the interest rate 3% to 1% on the back of the Bank of England reducing its base rate. In Olympic terms……it is Jessica Ennis-Hill going from gold to silver……still good and a commendable effort but not as good as before. 

 

The initial message to anyone with a Santander 1-2-3 account is not to switch in anger now because the 3% interest rate holds until November.

 

However, the bigger message should be one of concern for savers. With inflation rising and savings interest rates falling, there is the real prospect that the safe haven of bank based savings could actually create a loss for savers in real terms. Or to put that another way……the interest rate being lower than inflation.

 

Now imagine if interest rates turn negative and you have to pay for a bank to hold your money for you whilst inflation keeps rising……it’s a car crash waiting to happen. (see my previous blog 'Bank of Mattress'

 

 

All in all, savers earning less interest can only have a detrimental impact on consumer confidence (and in turn the economy).

 

Not good.

The One Thing You Don't Do Is Nothing

 

Bank of England boss Mark Carney turned into a financial action figure last week and rode into the City slashing interest rates to 0.25%. This was pretty dramatic stuff……the Bank of England has been around since 1694 and interest rates have never been this low.

 

So what’s going on?

 

The UK economy has turned into a bit of a spluttering Ford Escort and the thinking behind cutting interest rates is to inject some turbo fuel into the engine. The concept is pretty simple and well used in the UK……if the cost of debt is cheaper then businesses will be more likely to borrow, to employ, to make stuff and in return, the public will be more willing to ‘spend spend spend’ and avoid steering the Ford Escort into a recession.

 

So that’s the theory, but the reality looks like this:

 

• Savers are stuffed. Their already meagre returns will evaporate further.

 

• The £ against $ is getting hit further as the UK looks even less appealing to Mr and Mrs International.

 

• Pension holders looking to buy an annuity will scratch their head in bewilderment.

 

• There is a little cheer for mortgage holders on a variable rate though (about 50% of borrowers) as they could see mortgage payments reducing……but that assumes the banks pass on the interest rate reduction!

 

And whilst all this goes on, we have a complete lack of action or urgency from the Chancellor who seems happy to ‘wait and see’ until the Autumn rather than be proactive in using the tools available to him (tax cuts, spending incentives, etc.).

 

I am a great believer that “the one thing you don’t do when things aren’t going well is nothing”. Over to you then Mr Hammond!

Bank of Mattress

 

It isn’t something we have ever really contemplated seriously in this country, but there is the real possibility that we may have to pay banks for having money with them if interest rates turn negative.

 

With the base rate currently at 0.5% and many bank savings rates around this level, any downward movement by the Bank of England could see savings rates turn negative. Or to put that another way……how would you feel about paying the bank 0.5% - 1.0% each year to look after your money?

 

There is no doubt that many savers would struggle to get their head around this but that is a real possibility. So much so, that Nawest have already written to business customers to confirm that the bank has a clear intention to force account holders to pay to hold money with them if interest rates are reduced / negative.

 

And this isn’t unique to the UK……Denmark, Sweden, Switzerland and Japan have had negative interest rates for some time.

 

However, a move to negative interest rates in the UK would turn a key part of banking on its head, with banks effectively being paid to store people’s money. In effect, savers would be penalised for keeping money in bank accounts rather than under the mattress.

 

The Bank of Mattress could become very popular again!

And So It Begins

 

 

Britain's decision to leave the EU has led to a dramatic deterioration in economic activity not seen since the aftermath of the financial crisis according to the data from IHS Markit's Purchasing Managers Index.

 

The index has fallen to 47.7 in July, the lowest level since April 2009 (a reading below 50 indicates economic contraction) and is the first major evidence that the UK is entering a sharp downturn.

 

The only other times we have seen this index fall to these low levels was the global financial crisis in 2008 / 2009, the bursting of the ‘dot com’ bubble and the 1998 Asian financial crisis.

 

The figures from the index are taken seriously by economists as early warning signs of what is to come. When there is a downturn, the index generally tells the same story. So this is a troubling set of results. But it is just one month’s worth of data. It is possible that this is shock-induced and that the economy will right itself in the coming months.

 

That said, the survey results do increase the chances of some action from the Bank of England……perhaps an interest rate cut in August or some additional spending plans in the chancellor's Autumn Statement.

 

One thing is for sure, no action just isn’t a consideration.

 

Interesting times

Time For An Economic Philip

 

 

With Theresa May’s feet firmly secured under the Number 10 dining table, she moved sharply and ruthlessly in arranging her new cabinet. Of significant importance was the appointment of her new neighbour / new Chancellor of the Exchequer……Philip Hammond.

 

In economic terms, this is a big one……it is in the top 10 most pivotal positions in the world. The appointment is that critical.

 

What we do know and what Philip Hammond is acutely aware of is that “the immediate impact to the UK economy comes from businesses pausing investment decisions”. This leads to economic slowdown, which in turn could lead the UK into a recession.

 

What we don’t know is what economic tricks Philip Hammond has up his sleeve to provide short-term economic stimulus. A kind of economic red bull if you will. The obvious action would have been to hold an emergency Budget but he has confirmed that he will wait until the Autumn Statement to set out his plans. The concern is the damage that will be done by delaying.

 

Philip Hammond has an opportunity for some radical tax / funding / investment innovations……with so little experience, will he get the balance right?

May The Force Be With You

 

 

Having an undemocratically selected Prime Minister in a democratic society takes some doing, but we have managed just that! Step forward Theresa May. I think this pretty much sums up the mess that has been created perfectly.

 

What we do know is that she is not afraid to pull the ‘exit’ gun and fire the bullet to leave the EU. As she announced forcefully, “Brexit means Brexit”. I guess the direction of travel and timescales will become clearer as the weeks progress but there should be very few surprises.

 

What I am concerned about is transparency……well, Theresa May’s interpretation of it. In fact I have a bee in my bonnet about Westminster and transparency. Actually, I’ve had my knickers in a twist for a few months and wrote about it in April (Tax Transparency http://stevesmithlive.blogspot.co.uk/2016/04/tax-transparency.html)

 

Now, some would give Theresa May credit for going public with her tax affairs during the leadership campaign for being transparent. However, simply telling us that you have submitted your tax returns tells us that……you have submitted your tax returns.

(if you have no life like me then you can read it here: http://www.theresa2016.co.uk/theresa_publishes_her_tax_returns).

 

However, it is the detail of the tax returns that have not been shown that is a key point.

 

For example, £5,419 of income relates to dividend payments for shares she owns. Ok then, so which company shares? She will be one of the most significant and powerful people (from an economic perspective) in the country and in the top 10 in the world. Is it too much to ask which companies she could benefit from and have a conflict of interest in when she is setting political and economic policy? Will Brexit enhance the value of these shares and her back pocket?

 

In an age when the lack of transparency at Westminster causes so many problems (just ask David Cameron), Theresa May’s version of transparency is simply laughable.

 

And that ladies and gentlemen is your new unelected Prime Minister.

Dizzy ISAs

 

Turning a good political policy into a successful financial product rests on getting the detail right……something there seems to be little of for the new Lifetime ISA.

 

Many of the details around how the Lifetime ISA will work are undecided yet they will launch in just 10 months.

 

Chancellor George Osborne has set a launch date of April 2017 and has outlined the basics. However, plenty of details are yet to be decided that could have a significant impact on the savings and pensions markets……and those that might actually use them (little old you and me).

 

The onus is on the Treasury to address these issues quickly. April may seem a long way off, delivering on such a big project will require much preparation.

 

The issue at its most basic is that the Lifetime ISA looks, feels and smells too similar to a Pension. As Pensions Minister Ros Altmann stated perfectly…… “ISA is not a pension and a pension is not an ISA’.

 

A lack of clarity creates confusion. Confusion will simply mean that people just won’t use Lifetime ISA’s.

 

Is it too much to ask for some finer detail please?