Interest rates: Bank of England urged to help savers

Saga boss Ros Altmann says 2010 'dreadful for pensioners'
Annuity rates pushed down by quantitative easing
MPC believes inflation is temporary

The Bank of England's monetary policy committee has been urged to support Britain's savers by raising interest rates today.

Pensions expert Dr Ros Altmann, the director general of Saga, warned that retired people have suffered badly since rates hit their record low of 0.5% in March 2009. The cost of borrowing has been unchanged since, despite inflation running well ahead of official targets for the whole of 2010.

With this month's rise in VAT adding to inflationary pressure, there has been speculation that the MPC could surprise the financial markets with a surprise rise in interest rates today.

Altmann claimed that the UK's 13.5 million pensioners, many of whom rely on interest from savings, were being "sacrificed" to the government's economic policies.

"2010 was the third consecutive dreadful year for pensions and pensioners and without action from the Bank of England it can only get worse", said Altmann.

Saga also hit out at the Bank's efforts to stimulate the economy by buying bonds with freshly created money, saying this 200bn quantitative easing programme had driven down the value of private pensions. Annuity rates - the annual income provided by a pension pot - fell by 2.7% in 2010. Altmann argues that this is because QE has created more demand for corporate and government debt, driving down the amount of interest that these bonds yield.

"Inflation, as everyone can see, has been rising sharply as annuity rates have been falling. This is a double whammy for pensioners."

The MPC has argued that the rise in inflation is being driven by temporary factors, and that the rising cost of living will soon slow sharply. However, one member of the committee, Andre! w Sentan ce, has been pushing for a interest rate rise.

Most City economists expect rates to remain unchanged until well into 2011, though.

"Inflationary concerns are currently rising and there is mounting pressure on the Bank of England to raise interest rates earlier than most MPC members would probably like to given the serious growth headwinds facing the economy," said Howard Archer of IHS Global Insight.

"Nevertheless, it seems highly unlikely that the Bank of England would hit the economy with an interest rate hike today, only a matter of days after VAT had risen from 17.5% to 20%," Archer added.

Inflation, as measured by the consumer prices index, hit 3.3% last month, and the Bank itself has predicted that it could reach 4%.

While a rise in interest rates would cheer savers - providing high street banks passed it on to their customers - it could send a chill through the housing market.

Research issued by insurer MarketGuard today showed that 2.7 million borrowers with tracker or variable rate mortgages would struggle to meet their mortgage repayments if they rose by more than 100 a month.

"It is clear that we face a major problem if rates start to move dramatically upwards in response to inflationary pressure," said Chris Taylor, chief executive of MarketGuard.

The MPC will announce its decision on interest rates at noon.


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