Get ready for 0 percent interest on your savings and a pound worth only �1
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Get ready for 0 percent interest on your savings and a pound worth only �1

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Thursday, 08 Jan 2009

While there are silver linings in the recession, people have to negotiate quite a few dark clouds first. Millions of savers are waking up to the fact that their nest eggs are no longer generating a return; the interest on savings accounts has dropped to as little as 0.1%.

That is not going to get any better. This week the Bank of England is set to cut interest rates, already at a 57-year low of 2%, even further, taking them to their lowest in more than 300 years of the Bank’s existence.

Interest rates in America have already dropped to a fraction above zero. The Bank is set to follow suit with further cuts in the coming months. “We expect the Bank rate to fall to a low of 0.5% in the second quarter of 2009 and then stay there for the rest of the year,” said Howard Archer, chief UK economist at IHS Global Insight. “However, it is far from inconceivable that interest rates could come all the way down to zero.”

Critics say the interest rate medicine is not working, because banks are still cutting back on the amounts they are prepared to lend. Following an official survey showing the squeeze on credit is still tightening, the Treasury is considering a range of further measures to jump-start lending by the banks. It may require even more taxpayers’ money for the banks, on top of the £37 billion already provided to high-street giants.

So far, that money and arm-twisting by ministers has failed to persuade the banks to turn on the lending taps. And as long as the crunch on credit persists, this will mean further rises in unemployment. The Chartered Institute of Personnel and Development has warned of the worst year for jobs in two decades, with 600,000 redundancies. Another job market survey, from the Recruitment and Employment Confederation in conjunction with the accountants KPMG, is set to confirm the gloomy picture this week.

Economists warn that firms that borrowed heavily in the run-up to the recession, including those backed by so-called private equity deals, are most vulnerable to big lay-offs. The Christmas period has seen carnage on Britain’s high streets, with several high-profile chains, including Woolworths, Zavvi, Whittard, the Officers Club, Adams and Morgan, going into administration.

There is also little sign of optimism in the housing market. The Halifax says house prices fell by more than 16% last year, the biggest drop on record. Its gloomy assessment is likely to be confirmed by the Nationwide building society this week. The number of mortgages approved has plunged to a record monthly low of 27,000. Analysts say a pickup in lending is essential if house prices are to stabilise.

For recession-hit Britons battling the January chill, there is also scant comfort to be gained from travelling abroad, thanks to one of the downturn’s side effects, the plunging pound.

Like many others, Ian Ryrie has had his plans for travelling to Europe thrown into disarray by sterling’s fall. Ryrie, a quantity surveyor from Cheshire, was hoping to celebrate his 30th birthday this year with a trip to Rome to take in the sights and some fine food and wine. Now he’s having second thoughts.

“When you’re planning a holiday, the euro being worth the same as the pound makes you stop and think,” Ryrie said. “In the past few months it’s just crashed.”

A year ago £1 could buy €1.40; now the currencies are at virtual parity: £1 buys €1, if you’re lucky. With commission rates taken into account, some tourists are already paying more than £1 for €1. A beer in Val d’Isère that cost £4 last year will cost closer to £6 this year.

Full article at: http://business.timesonline.co.uk/