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The balancing act of inflation and interest

Since the Bank of England (BoE) Governor, Mark Carney announced that interest rates wouldn’t rise until there was a drop in the unemployment rate, never has the UK been so interested in inflation and the number of people who gain employment. The BoE is looking to reach a flat target of 2% for inflation, it currently sits at 2.7%. It also will only consider looking at raising the base rate from 0.5% until approximately 750,000 people are back in employment meaning a drop from 7.8% to 7%.

Mr Carney has highlighted that the focus is on recovery for the economy rather than for savers saying, “The prospect that interest rates might stay at their low level for longer will not be welcome for savers,” he said. “I have tremendous sympathy for them – after all they have done the right thing, set money aside, and now they are earning returns that are substantially below what they would have expected.”

With most economists agreed it will be three years before we see any change in rates, it now leaves the majority of savers in a balancing act between interest and inflation with unemployment acting as the catalyst for change.

This is not good news for savers with money in cash ISAs or traditional savings accounts, as the CEBR report into negative savings in the UK forecasts that annual household savings will rise by 21.6% from £77.4 billion in 2013 to £94.1 billion in 2018 meaning billions of saver’s pounds could be lost to underperforming interest rates. Typical household savings accounts are far below inflation at present with the average interest rate at 0.67%. Before the financial crisis the annual return on cash ISAs was above consumer price index (CPI) inflation, this hasn’t been the case since mid-2008 and is unlikely to improve for at least 24 months depending on how quickly the unemployment rate now comes down.

Balancing the rate of inflation against a positive return on your money now means paying even more attention to what is happening with your own rates and the wider economy. Fortunately, peer to peer lending is fast becoming one of the most reliable and consistent ways to beat inflation and earn a good return on your money. Riskier alternatives like stocks and shares can be very unpredictable and require a great amount of attention in order to get the best return. The benefit of Zopa is that your money is spread over 100s of people which makes it a very low risk way to earn a high return. Zopa also has a Safeguard fund in place to cover any money owed including the interest if a borrower is unable to repay.

While the BoE continues to keep the base rate at 0.5% for the foreseeable future (2-3 years), Zopa is one way to tip the scales in your favour and beat inflation with projected returns up to 4.6%.

We have over 43,000 active savers lending amounts from £10 to over £1 million and £126m has been lent in the last 12 months by people just like you. It may take 2-3 years before savings rates rise above inflation, but with P2P lending the returns are already in your favour to help your money work as hard as you do.

* Charts taken from CEBR analysis, Bank of England