How Global Economy Fears Have Hit UK Savings

by David Redmond on 30 Mar, 2011

Globalisation has as many disadvantages as it does advantages. The same worldwide economic system that brings you bananas all year round is also responsible for keeping interest rates on even long term ISAs relatively low.

Recent weeks have seen at least two 5% 5 year ISAs taken off the market (by Close Brothers and Skipton Building Society) in response to global economic troubles sparked by the Japanese tsunami, Libya and unrest in the Middle East at large.

We’re all in this together
But how can events happening on the other side of the world affect our savings rates?

Well, the consequence of developing a global market over the past few decades is that all national economies are now intrinsically, some may say painfully, interconnected. The tsunami in Japan has caused enormous economic difficulty in Japan due to energy shortages, factory closures and the massive relief effort.

All of these factors have contributed to a global uncertainty about the Japanese economy, as well as anticipated stock shortages for technology products manufactured in Japan. This has caused an enormous slump in the Japanese stock market, wiping out a hefty sum from the global markets as a whole. Less money is going into Japan, and less is coming out. For the 3rd largest economy in the world, that’s big news.

Unrest in the Middle East, and in particular Libya (one of the West’s principal oil suppliers) has driven already high oil prices even higher, making business more expensive. The prime factor here is that when oil prices go up, petrol prices go up, and that makes it significantly more expensive to transport goods. This puts the cost of goods up, and everything else follows.

What does this have to do with my savings?
A lot. It means that banks will be more cautious in how much money they payout, given the uncertainty in the financial markets where they make most of their money. This means lower interest rates for savers.

It also means that the Bank of England is less likely to hike the base interest rate any time soon. Although inflation has gone up faster than expected, and an interest rate hike would be the expected reaction, the Bank is also under pressure to keep money cheap for businesses hit by rising oil prices and to assist in the growth of the British business following the financial crisis.

As long as the base rate remains low, interest rates for savers will remain low.

About the Author

David Redmond

David Redmond is a Partner of Don Gilliard Finance Group. He is a fee-only, independent financial advisor and financial planner. For over 15 years, he has been helping individual investors and their families realize their investment goals.