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News Comment
a personal view from Erithacus

7th November 2009 

The FTSE100 index finished the week at 5142.72, only a few points off its highest level of the week having dipped under 5000 briefly on Tuesday.

Although the announcement that strike action by postal workers had been put on hold until after Christmas made headlines in most of the financial press on Friday morning, there remained more than enough concern about banking and the economy generally to fail to spark any real optimism.  

The last minute decision by General Motors not to sell its Vauxhall and Opel operations in Europe, sparked by better than expected car sales in the US, caused considerable anger and political embarrassment in Germany where the government had backed the sale.  The move produced mixed reactions in financial markets, and looks set to rumble on for some considerable time both politically and financially despite direct contact between US President Barack Obama and German Chancellor Angela Merkel to achieve agreement.

_______________________________________________

Interest rates for savers are still going down?  On the face of it, it seems extraordinary that when the Bank of England has just announced it will keep the base rate at 0.5% for the eighth month in a row, many savings accounts are actually reducing the rates paid to savers.  Surely the logic is that interests must rise soon, and therefore banks should be thinking about attracting savers with higher rates?
Not so.  It is pure economics and actually makes a lot of sense.  First, reluctantly, we have to admit that we need banks to make a profit.  It may be a simplistic way of putting it, but we all know that it was the risk of the banks finding themselves in a severely loss-making situation that set off the financial crisis.  All the shouting about unrealistic bonuses for bankers is not much more than a red herring.  Even accepting all the mistakes they undoubtedly made, most of these characters are the most astute financial brains in the world, and it is the large salaries and big bonuses that attract the best people to such positions.  Stop paying them such large amounts, and inevitably they go elsewhere.  If the best we have make mistakes, can you imagine what the others might do?  It doesn't bear thinking about.
So why the low interest rates on savings?  And, more importantly, why are those rates still dropping?  The answer lies in the fixed mortgage rates given to borrowers over the last few years.  Whilst current mortgage rates have, with much prodding of mortgage lenders by the government and others, dropped substantially, those many, many borrowers on a higher fixed rate have helped to mitigate the sudden drop in interest revenue forced on the lenders.  Therefore, logically enough, they were still able to offer slightly higher rates to savers than would otherwise be the case.  Now, however, those fixed rate deals for borrowers are coming to an end.  Most, if not all of them, will be taking advantage of the very low rates of a standard variable mortgage, or even taking a slightly higher rate than the current standard variable for another fixed term.  Either way, the interest revenue for the lender will be well down on the level it was previously.  And simple banking economics dictates that you can't run a business by borrowing money (from savers) that cost you more than you lend money (to borrowers) - and you can't risk borrowing money more cheaply from sources that may go out of business or demand it back suddenly, which was, in part at least, what brought us to this financial crisis in the first place.

So?  We can't expect as much of a return on our savings.  We can't have it both ways, and there's no "quick fix" for it.

Is there an answer that will sort out the problem for so many who depend on income from their savings?

Well, yes, there is.  But don't necessarily expect it to work for you.  I only mention it because it has clearly worked for two UK individuals last night, Friday 6th November.  I should only point out that we can't all expect to win 45,000,000 on the Euromillions Lottery every week.

I can only hope...



7th November 2009                        



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