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NS&I Slash Interest Rates

NS&I have announced a zero interest rate policy commencing November 24th 2020. Not only is this unprecedented but, in addition to a reduction in income for millions, it is a clear indication of UK government economic policy.

The government asked NS&I to fund £35 Billion of debt this year (2019 £6 Billion). In the first quarter of the new financial year they took in £14.5 Billion net. Clearly they have decided that there is no need to pay interest to achieve this goal.

The latest 50-year government bond pays interest of 0.4% p.a.

What the government have achieved is the ability to borrow money at almost no cost. The UK government have 50 year funds at less than 1% interest. If it can get inflation up to > 1% they are in effect being paid to spend without restraint.

We believe that rather than following general interest rates, NS&I’ s move will lead a race to the bottom for other institutions, meaning that the cost of security (i.e. £100 still being £100 in six months’ time) will be inflation. You may as well keep the cash under your bed!

Right now, we wouldn’t move NS&I cash elsewhere. (Premium Bonds still pay a notional rate of around 1% so remain an o/k bet). Wait until November, if other rates elsewhere are significantly more than the NS&I are offering then move up to £85,000 lump sums elsewhere. If, as we suspect, the rates on the market are much closer to the new NS&I rates, then leave your cash with NS&I and accept it losing value in real terms (albeit slowly).

As for the financial outlook, the traditional way of measuring risk is the rate of return over and above that offered by secure government investments. If you want investment returns which even match inflation you will have to accept asset backed investment risk. This means that one year you might lose 25% of your asset value in return for an average return over 10 years of say 3% pa.

The low cost of borrowing is bound to lead to further printing of money which will lead to inflation. A good thing if you want to reduce government debt, a very bad thing if you are trying to maintain the real value of your savings.


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