Inflation and zombie accounts
One of the big personal finance stories in the last months of 2016 was the rise in inflation to 1.2 per cent. That means that on average, the purchasing power of money decreased by 1.2 per cent over the previous 12 months (there’s a good explanation of inflation here).
Low and stable inflation is actually considered to be a good thing – the government sees it as a sign the economy is growing at a healthy pace. However, it does present a problem if your money isn’t growing quickly enough to keep up: if your savings or investments earned less than 1.2 per cent in the last year, unfortunately they lost money in real terms. “Zombie accounts” which deliver an interest rate inferior to the rate of inflation have significantly grown in number: according to recent research, fewer than a third of notice savings accounts offer a rate which currently beats inflation, and no easy access account is able to match it.
As a result, we expect that in 2017 more people will take action by moving some of their money into investments, such as peer-to-peer lending, which involve taking on some risk but offer greater returns.
Rates: more of the same?
At the start of 2016, many people expected that the next change to the Bank of England base rate would be an increase. However, the base rate was actually reduced after the Brexit vote, and is now at a record low of 0.25%.
Interestingly, if the base rate were to be cut further (or even move into negative territory) there is very little room for banks to pass that on to savers, given that accounts are already paying close to 0 per cent. One possibility would be that savers would need to pay a fee in order to keep their money in a bank, rather than earning interest.
However, there is a potential advantage to negative interest rates for borrowers: sub-zero interest rates in Denmark meant that one homeowner found that his bank wrote him a cheque instead of charging him interest on his tracker mortgage.
More financial innovation
When it comes to change in financial services, necessity is the mother of invention. The aftermath of the financial crisis ushered in a period of new thinking, focused on giving choice and control to consumers. Peer-to-peer lending is one such innovation and it has grown in popularity as investors have embraced the opportunity to directly access the asset class of loans.
We’re still developing our offering – our SIPP product, which took home a gong at the 2016 Financial World Innovation Awards is a good example of this – and new, dynamic companies are shaking up every corner of the market, helping to deliver more value to consumers.