Deflation Threat to Affect Savings Accounts
21/11/2008
Many savings accounts could end up paying 1% or even 0% interest if the base rate is cut again.
The Bank of England's November inflation report raised the possibility of deflation which, if it took hold, would cause property and retail prices to fall continuously. Japan, for example, has spent about 20 years in a spiral of deflation. Falling prices are dangerous for an economy, as consumers will rein in spending but will not be rewarded for saving.
In order to avoid deflation, the Bank of England is expected to cut the base rate even further, following its surprise cut of 1.5% earlier this month. If a further rate cut is passed on to savers, it will mean one in five savings accounts will pay less than 1% interest on deposits.
The Bank of England's November inflation report shows the Consumer Prices Index (CPI) falling from 5.2% to just 1% in 2010. The Bank also estimates there is a 20% chance it will fall below zero.
John Higgins of the consultancy Capital Economics said: "Deflation is not always bad news. It is important to distinguish between a relatively short period of negative inflation due to the unwinding of a commodity-price shock, and a more sustained period of generally falling prices and wages that can result from a debt deflationary spiral. For now we only expect the first."
The Bank of England's November inflation report raised the possibility of deflation which, if it took hold, would cause property and retail prices to fall continuously. Japan, for example, has spent about 20 years in a spiral of deflation. Falling prices are dangerous for an economy, as consumers will rein in spending but will not be rewarded for saving.
In order to avoid deflation, the Bank of England is expected to cut the base rate even further, following its surprise cut of 1.5% earlier this month. If a further rate cut is passed on to savers, it will mean one in five savings accounts will pay less than 1% interest on deposits.
The Bank of England's November inflation report shows the Consumer Prices Index (CPI) falling from 5.2% to just 1% in 2010. The Bank also estimates there is a 20% chance it will fall below zero.
John Higgins of the consultancy Capital Economics said: "Deflation is not always bad news. It is important to distinguish between a relatively short period of negative inflation due to the unwinding of a commodity-price shock, and a more sustained period of generally falling prices and wages that can result from a debt deflationary spiral. For now we only expect the first."
