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February 2010 Commentary

MPC Minutes show inflation expected to stay high for now 17th February 2010

Bank of England

The minutes of the Bank of England's February monetary policy committee meeting, published this morning, showed a unanimous vote to keep the base rate at 0.5% and maintain the asset purchase programme at £200bn. The focus was on the uncertainty of how the economy would evolve and so "there was little merit in attempting to fine-tune monetary policy in the hope of achieving comparatively small changes to the future path of inflation".

However, whilst the Committee's February Inflation Report projection "indicated that CPI inflation was more likely than not to be below target for much of the three-year forecast period, .... the near-term outlook was for it to increase further".

The Bank's outlook for 2010 is for interest rates to remain low whilst inflation is expected to be high, at least for the next few months. This means that savers have a challenge to find investments that will beat inflation. At the current CPI rate of 3.5% this means that basic rate taxpayers need to achieve a gross return of 4.38% and higher rate tax payers need to achieve 5.83%, just to keep pace with inflation. When the 50% tax rate comes in on 6th April, these taxpayers will need to achieve 7% just to stand still.

There are products in the market that can provide protection against inflation and these include National Saving's index linked accounts, which are currently offering 1% over RPI on three and five year certificates. The maximum investment is £15,000 per issue.

Source: Bank of England, MPC Minutes February 2010

Interest Rate Outlook 8th February 2010

With the Bank of England holding the base rate at 0.5% last week, there seems to be little prospect of rates increasing anytime soon. This is reflected in the December Bankstats, published last week, with new business rates being somewhat lower than rates earned on existing deposits.

Households earned a monthly average weighted rate of just 0.73% on their no notice bank and building society deposits in December 2009 and achieved an average rate on fixed term deposits of 2.45%. This compares to an average new fixed term rate of 2.40%, some 5 basis points lower. Households continue to earn better rates than companies, with Private Non-Financial institutions earning just an average of 0.41% on no notice deposits and 1.05% on fixed term deposits.

Savers will need to shop around to ensure that they continue to earn the best rates on their cash investments.

Source: Bank of England, Bank Stats published monthly. Use this link to see the current month's statistics on the bank's website.

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