Interest rates

The Bank of England cut interest rates to a historic low in 2009 in an attempt to stimulate investment and consumer confidence in spending, and prevent deflation. Although a small increase is possible before the end of 2011, rates are likely to remain low until economic policy makers are certain that the economic downturn is over. Despite the low official rate, continued economic uncertainty and the aftermath of the banking crisis mean that lending remains subdued. Furthermore many people on low incomes lack access to mainstream financial services, and so face very high interest rates for personal debt.

What are the implications?

  • Decreased returns for savings accounts and some forms of investment (see stock market performance) may mean a reduced income for charities with reserves - especially grant making foundations.
  • Charities with a secure revenue stream may be able to take advantage of the low interest rates to invest in new buildings and equipment (see loan finance).
  • Mortgage holders may be better off because of reduced monthly repayments - especially those on standard variable rates or tracker mortgages taken out before the financial crisis (see housing market).
  • Falling income for people who rely on interest from their savings - particularly for older people (who give the most money to charity).
  • Decreased pension returns may increase pension deficits, and a reduced annuity available on retirement.
  • Many people continue to struggle with the cost of personal debt, paying punitive rates of interest from door-to-door loan providers, pawnbrokers and loansharks.
  • A weak exchange rate, meaning increased costs for charities working internationally, and increasing the price of imported goods such as oil.
  • Pressure on the Bank of England to increase interest rates again, particularly if inflation remains high

Moving forward

  • Do you need to review your investment policy to make sure that you are striking the right balance between risk and reward? Are you managing your cash reserves effectively?
  • Interest rates are likely to rise in the future. Will you look around to make sure you are getting a fair deal when interest rates rise?
  • Is now a good time to invest in new capital? Is it worth taking a risk, and borrowing now in order to purchase or refurbish new premises or equipment - could this increase your effectiveness or your income in future?
  • What does this mean for pension provision? Could this increase demand for your services in the future, particularly given the ageing population?
  • Are the pension benefits you offer to your staff sustainable - defined benefit schemes are expensive and many schemes are in deficit, but other alternatives place a high level of risk with individual employees. What is appropriate for your organisation?

Want to know more?

Financial Statistics

Published by: Office for National Statistics

Date: Monthly reports

Format: PDF

What is it? This is a useful regular report giving reliable financial statistics. It is based on official government statistics. Data on interest rates is on page 150 of the July 2009 report.

How useful is this? ONS data is subject to rigorous quality standards so the data in this report should be considered very reliable. The report is useful if the underlying financial figures are needed, for example in mapping trends or exploring relationships between organisational data and the broader financial context.

Interest rates cut means “sector will suffer in the short term”

Published by: Third Sector magazine

Date: January 2009

Format: Web

What is it? This article gives a brief account of how interest rates might affect the voluntary sector.

How useful is this? The article gives an outline of some of the key concerns that might arise. As such, it may be a useful starting point for exploring this driver. It would be less valuable later in the analysis when detailed data is needed.

Financial Statistics

Published by: Office for National Statistics

Date: Monthly reports

Format: PDF

What is it? These are useful regular reports that provide reliable financial statistics. They are based on official government statistics.

How useful is this? ONS data is subject to rigorous quality standards so the data in this report should be considered very reliable. The report is useful if the underlying financial figures are needed, for example in mapping trends or exploring relationships between organisational data and the broader financial context.

Other comments:

Background: Inflation and Interest Rates

Published by: The Ernst and Young ITEM Club - a group of private sector economists making independent forecasts.

Date: January 2011

Format: Web

What is it? A short article setting out the background to inflation and interest rates, and what the wider economic climate means for the future direction of monetary policy. There is also a link to a PDF containing a more in-depth economic forecast.

How useful is it? The Item Club are a respected group of economists. This article does a good job of explaining inflation and the implications for interest rates. This is important, because the Bank of England are charged with setting interest rates based on a sole objective of targetting a 2% rate of inflation.

 

 

 

Last updated at 15:24 Fri 25/Mar/11.

Recent comments

AuthorComment
Karl's picture

Karl

Third Sector Foresight

I think it’s debateable whether or not this does have direct implications for the sector. Its certainly the case that foundations will be impacted: remember they are in effect savers who live off the dividends and interest from their investments. So, an increase in interest rates will (ceteris paribus) increase their income. Which means they have more money to give to the frontline organisations reading this blog.

Balanced against that is the obvious fact that more organisations are borrowing. Loan terms vary and of course the foresightful (again, those reading this blog I hope) will have borrowed at fixed rates. For others, higher interest payments mean less to spend on charitable purpose.

The sector is, overall, a net saver. So, increased interest rates should lead to a direct increase in the sector’s income. However, the donor in the street might have less disposable income if they are paying more out on the mortgage. In other words, increased interest rates should lead to an indirect decrease in the sector’s income. What the Bank of England giveth they taketh away…

By the way, if you want to construct your own trend chart to show changes in the base rate you can copy all the figures from the BofE’s stats page

Dear Karl,
We might want to give some thought to the secondary effects of lower interest rates.
Falling interest rates are dragging down annuity rates. Just to make the point, the annuity rates determine how much you gat each month from your pension.
So we have a situation arising where the population living on retirement income is set to rise dramatically (the Boomers are reaching retirement age), just as the amount they can live off hits all time lows.
Net result – low income pensioners for decades to come. That’s bound to have an impact on the ‘relief of poverty’ charities.
Best wishes,
Stephen

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