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Cash Reserves Advice as Interest Rates Are Cut

Dr Emma Black, leading financial expert in cash management and MD of Cascade Cash Management (Cascade), rounds up the financial impact of the Covid-19 outbreak and the chancellor’s budget on the savings market, with recommendations on where your cash is safest during these turbulent times.

The Bank of England’s Monetary Policy Committee (MPC) has cut interest rates to 0.25% to help UK businesses and households manage the economic implications of the Covid-19 outbreak following an emergency meeting held on 10th March 2020. The MPC voted unanimously to reduce the base rate alongside accompanying monetary measures to provide additional support, particularly to Small and Medium-sized Enterprises (SMEs) with the announced TFSME scheme to improve the availability of finance. These measures follow a marked spread in the transmission of Covid-19 around the world which, coupled with an oil price war between Saudi Arabia and Russia, has seen markets drop substantially over a short time frame.

Mid-February 2020 the FTSE 100 traded at 7,547 points but less than one month later, the UK’s leading market index had fallen by over 20% to 5,993 amid fears that the escalating health crisis could evolve into a credit crisis as global firms face a significant impact in both the sale and production of goods and services worldwide. The outbreak of Covid-19 in China has impacted international supply chains dependent on exports from the factory of the world, while travel bans and preventative measures have begun to impact international travel too. More than £200bn has been wiped off the UK’s global FTSE 100 index as a result and it is expected that governments worldwide will seek to invoke fiscal stimulus too in order to counter a potential global recession.

Goldman Sachs has warned that the virus could push the UK towards recession and the incoming Bank of England Governor, Andrew Bailey, affirmed the need to act swiftly to limit the impact. Adjusting interest rates is simple and effective and thus markets correctly anticipated the action taken by the MPC at yesterday’s meeting.

Accompanying this expected monetary support, fiscal flexibility was announced by Chancellor Rishi Sunak in his budget. Sunak has stressed the importance of fiscal responsibility to fight the effects of Covid-19, particularly on SMEs who may face temporary cash flow issues as a result of the emerging outbreak. Measures such as permitting a “time to pay” forbearance on tax bills along with significant public spending help forge a pathway for businesses that may experience temporary difficulty.

While a fall in the base rate is positive for borrowers, savings rates are unfortunately once again heading downwards. Since the start of the year, many providers have already priced in a reduction of 0.25% as many expected, following the signed withdrawal of the UK from the EU on 31st January 2020, that the base rate would reduce from 0.75% to 0.50%. For example, Cambridge & Counties Bank reduced the rate on their 120 Day Business Notice account from 1.75% to 1.50% effective 31st March 2020 while the NS&I announced a reduction in their Income Bond rate from 1.16% to 0.70%, effective from 1st May 2020. The accompanying Covid-19 outbreak has unexpectedly increased market volatility and therefore it is expected that rates will drop further over the coming weeks.
At the time of writing, the best instant access rate for a Personal saver is 1.35% available from Chelsea Building Society, while for Business and Charity savers, Saffron Building Society leads the market paying 1.06% for deposits between £10,000 and £500,000. In the fixed term market, challenger bank Masthaven Bank is paying 1.71% for a 1 Year Fixed Term while Redwood Bank for the same term is paying 1.62%, both available for business deposits. In the Personal savings market, the Ikea family’s Ikano Bank is paying 1.56% while Habib Bank Zurich, Investec Bank and Shawbrook Bank are all offering 1.55% for a 1 year Fixed Term.

Dr Emma summed up:

“In times of increased market volatility, investors look for cash as a safe haven to weather the storm. Fixed Rate Bonds offer stability fixing the rate of interest, at a time when instant access and notice accounts will see fluctuations in their variable rates.

“For those able to lock into fixed term periods, there are still some competitive rates available in the challenger bank market. Many of these can be accessed through the Cascade portal which helps clients to simultaneously spread capital across banking licences to increase depositor protection. Our technology is Cyber Essential Plus accredited, meaning it’s security is approved by the National Cyber Centre.”

The team at Cascade will be paying close attention to how rates move over the course of the next few weeks and months. Ensuring safety of cash at these times becomes paramount and spreading capital across different banking licences helps to obtain depositor protection cover under the Financial Services Compensation Scheme.