In September the US and European central banks cut interest rates, again.
When the US central bank, the Federal Reserve, cut its main interest rate by 0.25% at the end of July, it was the first reduction in over 10 years. Less than two months later, the Fed announced a second cut by another 0.25%.
The Fed’s move followed on from a rate change at the European Central Bank (ECB). Here, the main rate was left unchanged (at 0.0%), but the negative rate applied to deposits made by commercial banks was moved from -0.4% to -0.5%. A bank leaving €1m with the ECB for a year will have to pay €5,000 for the privilege.
The Bank of England kept its interest rate unchanged at 0.75% in September, not least because, like the rest of the UK, it is waiting to see what happens on the Brexit front. Investors in government bonds appear to be expecting further rate cuts as the return available on gilts maturing in six months to 12 years’ time is less than the current base rate.
The central banks are worried about a slowing global economy and the risk of a recession. They are less concerned about their nations’ savers. This stance was highlighted in a headline in Bild, Germany’s best -selling newspaper, which took aim at Mario Draghi, the head of the ECB: “’Count Draghila is sucking our accounts dry’.
Depositors in the UK are not yet facing negative interest rates, although there are plenty of bank and building accounts (including ISAs) closed to new business which pay next to nothing (e.g. 0.1% for the Halifax Bonus Gold account). At the time of writing, the best rate available for instant access was 1.61% from a sharia account, compared with the latest published CPI inflation rate (for August) of 1.7%.
There are still income yields of 4% and more available – for example the average UK share dividend yield at the time of writing was 4.23%. However, the higher income comes with greater risk to capital, making independent investment advice essential. There has been evidence enough just this year, in the problems at London Capital and Finance, that chasing the highest yields without advice can be a dangerous strategy.