|Mervyn King: helping savers would push Britain back
The Governor of the Bank of England has ruled out help for savers hit by “negligible” returns on their savings, warning that moves to reward their prudence would tip the economy back into recession.
| February 15, 2012
Sir Meryvn King also suggested that growing household savings rates are one reason for Britain’s recent poor economic performance.
He also warned that the UK economy is set to “zig-zag” between growth and contraction this year, partly because of an additional bank holiday for the Diamond Jubilee.
The Governor was speaking amid growing public and political unease about the impact of the Bank’s emergency measures – pumping £325 billion of new money into the economy and Bank rate at a historic low – on savers and pensioners.
Those policies have cut the returns on savings and annuities to record lows. Saga, a campaign group, estimates that more than 1 million pensioners have retired with permanently lower retirement incomes because of the impact of the Bank’s quantitative easing programme.
Savers have also been hit by high inflation, though the bank predicted that inflation will fall back to 1.8 per cent by the end of 2014, easing the recent squeeze on household budgets.
Sir Mervyn insisted he understood the problems facing savers, but made clear he believes he can do nothing to help.
“I have deep sympathy with those who are totally unconnected with the origins of the financial crisis who suddenly find that the returns on their savings have reached negligible levels,” he told a press conference. "These are consequences of the painful adjustment prompted by the financial crisis and the need to rebalance our economy."
The Bank could respond by increasing Bank rate from its current level of 0.5 per cent to 4 or 5 per cent, he said. But that would push up the exchange rate, depress investment and consumer spending “and we would go back into a recession.”
“All groups in society are suffering from the financial crisis,” Sir Mervyn said, insisting that there can be no special help for particular groups. “Difficult though it is, we have to make a difficult judgement about the right course of action for the economy as a whole.”
During periods of economic turmoil, many people save more because they are worried about their future prosperity.
According to the Bank’s latest Inflation Report, the household savings ratio increased sharply during the recession. Even though it has fallen back since, the latest figures show households are still saving 6.6 per cent of their disposable income on average, well above the pre-crisis levels of 2007.
The report also suggested that saving may yet rise again, because “households may want to increase the amount that they save due to other factors, such as the need to save more for future retirement provision.”
Sir Mervyn said that savings were effectively acting as a brake on the economy: “One of reasons for slow growth in the last year was weakness of consumer spending and higher savings by household.”
The economy shrank in the last quarter of 2011, but the Bank predicted there will not be a second consecutive contraction, meaning no “double-dip” recession.
Growth this year will be around 1.2 per cent, but the expansion will be uneven. “For much of this year, there is likely to be a zigzag pattern of alternating positive and negative quarterly growth rates,” Sir Mervyn said.