Embattled pound, euro and US dollar savers have endured historically low base interest rates for over two years now, and it seems possible the UK could face further quantitative easing (QE2) in a last ditch attempt to steer the economy away from recession.
It’s hoped that QE2 will lift the brakes on growth and, while this is good news for borrowers, expats who save in Sterling may need more help to find good interest rates.
Growth prospects in the UK, Eurozone and US have worsened following a series of poor economic data. This, coupled with low domestically-generated inflation in those markets, makes it less likely that central banks will increase interest rates any time soon. In fact, Lloyds TSB now forecasts that the UK base interest rate will be held at its current, historically-low level of 0.5% until the third quarter of 2012.
In the UK, the market is becoming less focused on inflation and more pre-occupied with the prospect of weakening growth. The UK job market, a key indicator of growth, has softened noticeably in recent months and the preferred measure of unemployment stayed at 7.9% in the three months to July, just off its highest rate in 15 years. So, growth prospects remain poor and the likelihood that the base interest rate will increase remains low, although this is slightly tempered by inflation still being well above the 2% target set by the Bank of England, and forecast to reach 5% in September.
The picture for savers in the Euro is not much better where struggling peripheral economies like Greece, as well as larger economies like Spain and Italy cloud the overall outlook for growth. Lloyds TSB’s prediction here is for no increase in base interest rates till August 2012 at the earliest.
In the US, where the recovery is playing out with a dearth of new jobs, the Federal Reserve Bank has pledged to keep interest rates low for the next two years and we anticipate no increases at all until the first half of 2013 at the earliest.
How to improve returns
But in this low interest rate environment, there are still ways that your expat clients can improve the returns they get. Banking offshore gives them the flexibility to save in a variety of currencies and select the one where they get the best interest rate, while they should bear in mind the exposure to the foreign exchange markets that this gives them.
And if they are happy not to have access to a certain amount of their savings for a few years, by using a fixed term deposit (FTD) account, they can often benefit from a much better interest rate. Our five year FTD, for example, currently offers 4% interest and we continually review ways to provide better deals for customers.
I would expect expat savers to become more interested in FTDs as they hunt for better returns. The Lloyds TSB Economist recently said that the prospects of base interest rate increases in the short term are “slim or none, and ‘slim’ just left town”. That certainly seems to be the case. As a result, many savers will be thinking now may be a good time to take a three or five year FTD while better offers are still to be had.
Even if they need instant access to their savings, they should not presume they will struggle to beat the base interest rate with their savings account – there are plenty of far better deals on the market.
