Bank of England admits that its policy is to penalise savers

In an interview for Channel 4 news Charlie Bean, the Deputy Governor of the Bank of England, has made it clear that the Bank’s policy is that people should spend, not save and that the Bank has no intention to act to encourage saving maybe for as long as the next decade.

However he admits in the interview that preceding the financial crisis the UK was not saving enough. According to Mr Bean the Bank of England had been saying for years that more saving was needed in order to rebalance the economy. It is certainly true, in the years preceding September 2008 the UK savings ratio averaged 3.2%, by far its lowest levels since the 1950’s.  But it begs the question: why did they not act to encourage saving rather than wait until it was too late? The answer is probably because the Bank of England is not responsible for managing the level of saving in the economy and as far as I know there is no government target in place for the savings ratio and it is not actively managed at all.

In fact it was only a couple of weeks ago at a speech to the TUC that Mervyn King, Mr Bean’s boss at the Bank of England called for a higher national savings rate. Mr Bean described this difference between the need to increase savings and the current policies that are harmful to savers as a “paradox of policy”.

Another paradox though seems to be that the policies are having effects that are opposite to Mr Bean’s stated objectives. The idea behind reducing the Base Rate is that it should discourage saving and encourage borrowing and spending, the reality does not appear to be reflecting the theory.

For a start we are saving more – despite the lack of rewards -  the low interest rate sends the message to us all that we are in trouble and the general reaction has been to save more or repay debts, which amounts to much the same thing in economic terms. The result is that the savings ratio has increased to about 7% over the last year. The impact of the policy has been to deprive savers of an estimated £30 Billion of interest a year, much needed money that could have been spent in the economy.

As for encouraging borrowing the number of new mortgages each month has been falling, whilst the rates of interest charged on unsecured personal loans is greater than before the crash. To top this, businesses who are the real targets for the encouragement to borrow and spend are complaining of difficulties getting loans and high interest rates.

In fact the most obvious result of the policies has been to enable banks to re-capitalise their balance sheets and make enormous profits at the expense of savers as well as a large proportion of borrowers.

The Bank of England seems to have lost sight of the fact that behind these macro-economic policies that promote spending over saving as the key to economic recovery are real people whose financial security is being diminished. The majority of savers are ordinary families and individuals taking responsibility for their own financial situation. They are making sacrifices now in order to make provision for a better future for themselves.

It is through encouraging and enabling savers to do this that true long-term economic prosperity lies, not through penalising and squeezing them in the hope that a little more spending now – regardless of the long term consequences – will get the country back on its feet.

Added 29/09/10

Since writing this article the Office of National Statistics has just published the Savings Ratio for Q2 2010. The savings ratio for this quarter was 3.2%, which shows that overall savings are starting to fall, whether this is a direct result of the base rate or other policies is matter for discussion.

The long term consequences of these policies are potentially economically and socially dire. The end result a poorer population that views saving as a waste of time and increasingly reliant on the state.

Jason Riddle is a co-founder of Save Our Savers

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