Has the Bank of England taken savers for granted?

After a full parliament of near zero interest rates and quantitative easing, some are beginning to wonder whether the nation’s savers have been forgotten.

The Bank of England has taken the brunt of the protests, accused of forgetting the interests of the thrifty at best, and at worst of stealing from them by generating inflation.

The central bank has held its own interest rates at 0.5pc since the financial crisis, and has resorted to bond-buying to support the economy.

Stimulatory monetary firepower has acted as the backbone of the UK’s recovery, but for all the stability it provides, its distributional effects - who it makes better off and who it hurts - are often poorly understood.

For the UK, the question has become so important that Mark Carney, the Bank’s Governor, was grilled on the subject by MPs before he had even started on the job. Interventions started under his predecessor, Mervyn King, have been decried as an assault on savers by critics.

When quizzed by MPs, Mr Carney was defensive of Mr King’s introduction of QE, even before the Canadian arrived at Threadneedle Street. If the Bank had not introduced QE as its own rates came close to zero then the UK would have faced “a deeper recession, higher unemployment and very weak underlying domestic inflation”, Mr Carney said.

George Osborne, the Chancellor, has also spoken in defence of the central bank’s aggressive response to the financial crisis. He has argued that a combination of “tight fiscal policy and loose monetary policy is the right macroeconomic mix” to help rebalance the economy.

While the coalition has attempted to clean up the state’s spending habits, the Bank has been doing the heavy lifting in helping to support growth and get unemployment down.

In a speech at the Confederation of British Industry’s annual dinner two years ago, Mr Osborne explained that the Bank’s objective - to pursue 2pc inflation - has required it to offset the Government’s own purse tightening.

In doing so, he acknowledged that extra Government spending may have done little to boost the economy. “A fiscal stimulus three years ago would simply have been offset by less supportive monetary policy, with no net impact on demand,” Mr Osborne said. And conversely, without the Bank’s actions, austerity could have been more painful for the UK.

It is impossible to know exactly what would have happened to the UK without the Bank’s asset purchases, but one does not have to search far to find evidence of what happens when central banks do not step in.

The Japanese experience of stagnation followed more recently by the eurozone’s skirmishes with deflation both illustrate what happens when demand is allowed to falter. Mr Carney is convinced that if the UK were allowed to suffer the same fate, then more would have lost out.

But while the economy has got back on track, loose monetary policy has caused headaches in places. Any decision by the Bank to make its stance more stimulatory or less is a decision with redistributive consequences, and over the last Parliament it has been seen to lean heavily in one direction.

Ros Altmann, who the Conservatives hope will lead a review on financial fairness for consumers if the party is successful in the election, has been one of the loudest voices on Bank policy.

She has labelled the Bank’s decision to keep its rates at 0.5pc as one “about politics, not economics”. Ms Altmann has characterised easy monetary policy as a call to hammer pension funds and savers, which are “being penalised to support unsustainable borrowing”.

According to a McKinsey report, it has been Government and large companies that have been the main beneficiaries of the Bank’s stimulatory policy. Between 2008 and 2012 the Government has benefitted from £80bn in savings on its debt, while households have lost around £73bn in the same period, the consulting firm estimates.

Side effects from loose policy are especially visible for those operating defined benefit pension schemes. While not an issue for fully-funded schemes, those in a deficit have found that asset purchases have widened that deficit as the gap between the assets in their schemes and the pensions that are to be paid out has increased.

Since QE began the number of defined benefit pension schemes in a deficit has risen, hitting an all-time high of 5,175 in January, as the aggregate balance of all pension schemes worsened to a deficit of £367.5bn.

The Bank in 2013 said that some companies have reported that “pensions deficits were having an impact on their investment decisions and on mergers and acquisitions activity”. Michael Saunders, an economist at Citi, said that the issues highlighted by the central bank “may emerge again with this renewed escalation in pension deficits”.

The Bank’s survey of firms during April and May 2013 found that “around half of firms surveyed reported a somewhat negative impact from deficits on their investment spending”. While a shift from investment spending by firms to investment by pension funds may not reduce the level of investment in the economy, it may reduce its effectiveness.

The report also noted that: “A sizable proportion of firms reported a negative effect on dividends and pay.” The burdens of widening pension deficits have fallen on the shoulders of employers and future employees, to the benefit of those who are receiving payouts and are about to reach retirement.

Savers too have faced some adverse consequences, losing out on £70bn of interest between September 2008 and April 2012, according to Bank estimates.

But even as some will find that interest payments have fallen, QE has meant that many have been able to remain savers. “In the absence of QE, savers may have been more likely to lose their jobs, or seen companies that they owned go out of business”, the Bank said.

When QE was introduced, it was the wealthy that received the largest dividends. Financial assets were boosted by signs the central bank would support the economy, and these “holdings are heavily skewed with the top 5pc of households holding 40pc of these assets”, the Bank said.

The assets of the most wealthy could have been wiped out, but QE helped to prevent their collapse. Now that a crash isn’t feared, lower policy means that the wealthy are feeling the squeeze from low rates.

According to analysis by Kristin Forbes, a member of the Bank’s Monetary Policy Committee, 18 to 54 year olds have their incomes boosted by lower interest rates. It is those aged 55 and over - who hold the majority of financial assets - that could stand to benefit if rates went up.

If the Bank is hurting some portions of society, Mr Carney does not believe it is up to the central bank to address this. “Policy should always be set consistent with the remit from Parliament for the economy as a whole,” he said, referring to the Bank’s 2pc target.

“It is for others to decide whether to offset the distributional effects using other instruments”, he has argued. And as the Bank’s rates finally begin to rise for the first time since the crisis, the redistributive nature of its policy stance may also flip.

Now that the Bank is moving towards lifting its interest rates, creditors will benefit to the expense of debtors. But a prolonged period of easy policy may have made this harder.

Cheaper credit has meant that private debts have continued to build, and the costs of financing them may rise as the Bank starts to tighten up policy. A mounting debt pile made easier by the Bank’s decisions is now holding it back from the higher rates it might prefer.