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Finance: Interest Rates

Volume 718: debated on Thursday 8 April 2010


Asked By

To ask Her Majesty’s Government whether they plan to assist savers, following the analysis by the Office for National Statistics that savers lost out on £18 billion last year because of cuts in interest rates.

My Lords, low interest rates benefit many people with mortgages and employers using bank finance. However, they also mean that savers see their returns fall, which has a particular impact on older savers, so last autumn the Government increased the ISA subscription limit for the over-50s, increased the capital disregard in pensions credit, and encouraged pensioners to claim back any overpaid tax on their savings. ISA limits were increased for everyone earlier this week and will increase with indexation in future years.

My Lords, I thank my noble friend for that response. In particular, I am grateful for the steps taken by the Government to try to mitigate the impact on elderly savers. That is to everyone’s advantage. Does he not agree with me that the rate cut has been of enormous benefit to numbers of people, including, of course, business leaders in this country and to people who had mortgage problems? It means that those who might otherwise have been worried about their home security do not have that worry any more. For that I suggest that the Government are to be thanked.

My Lords, I thank my noble friend for that observation. She is, of course, correct: low interest rates have played an important role in supporting the economy and, in particular, have been of real benefit to those with mortgages. The Halifax building society has estimated that, compared with 2008, the impact of lower interest rates has had the same effect as an 11 per cent increase in real disposable income. The Bank of England has also referred to the fact that reduced interest rates have had an important impact on business and consumer confidence. I think the lower interest rates have been helpful to the economy, helpful to asset values, and, therefore, helpful to the value of people’s pensions and other savings.

My Lords, I declare an interest as a small saver who is not getting any calculable interest on most of his nominal assets. None the less, I well understand the need for lower interest rates as a central part of our macroeconomic strategy to produce the kind of excellent growth we are about to see. Will my noble friend consider the fact that when quite a lot of businesses, particularly small businesses, try to borrow, they are quoted enormously high interest rates, despite reading in the Financial Times and other newspapers that interest rates are low? Is there not a chance of a failing somewhere in the financial system, which means that people cannot borrow at the interest rates at which the rest of us are lending money?

Nine out of 10 small businesses are now paying lower rates of interest on their borrowing than they were three years ago.

My Lords, the Minister will be aware that nearly a quarter of the assets held in child trust funds are held in cash accounts. Can he explain why HMRC’s material on child trust funds, including the information on its website, contains no warning of the danger of negative real returns?

I do not think it would be appropriate for HMRC to be giving what would, effectively, be guidance on investment decisions. Nor do I think it is right that Government should seek to direct people. Given the appropriate information available on other websites, including the FSA’s, we believe that people will reach their own determinations on the best form of disposition for their child trust funds, ISAs and other forms of saving.

My Lords, with the deficit that will be running over the next few years, under any Government, interest rates are bound to go up. Is not the right way to help savers to take them out of paying income tax on the first £10,000 that they get? There is only one party offering that. The Minister did not seem this time to be talking about his friend Gordon Brown as the friend of savers or pensioners because, if, for the next five years, anyone were to believe that, that would be a monumental triumph of hope over experience.

The noble Lord asked two quite separate questions. The tax policies being proposed by the Liberal Democrats are well known and, no doubt, we shall all watch with great interest to see what the nation thinks of those plans when they come to cast their votes in the election. Low interest rates have played an important role in supporting the economy and in supporting asset values, although undoubtedly interest rates have played a major role in correcting the fall in house prices and keeping companies operating in an effective way in the challenging economic environment.

Like the noble Lord, Lord Peston, I declare myself as a small saver. Does the Minister not agree that a lot of elderly people find it very confusing that on some accounts the reasonable interest rate suddenly drops overnight to 0.01 per cent or something of that type and the good ISAs that are on offer will not take transfers from other ISAs? Elderly people are being asked to make extremely difficult financial decisions, particularly as many of them rely upon their savings and the interest on them to help their ordinary standard of living.

I am very conscious of the importance of interest income to many people in retirement. However, interest rates are set by the Bank of England and reflect the economic circumstances of the country. We are talking about not only short-term interest rates but long-term interest rates. The House should not forget that investing institutions here and overseas continue to be very attracted by investing in gilts at yields of less than 4 per cent. There are good investment opportunities available. I have checked the FSA’s website this morning. It gives guidance on finding the best interest rates available, and there are several products offering interest rates of more than 4 per cent. The implied longer-term trend in interest rates will see an increase in interest rates in due course, but I am aware that some people’s patience is being stretched by waiting for that increase to take place.