Inflation is eating contractors’ cash – but why?

On 2 November, the Bank of England announced its first interest rate rise in over a decade. At the press conference afterward, one journalist asked Governor Mark Carney the killer question: “Should banks, building societies, and others be passing this on in full to savers?”

“We do expect it to be passed on,” came the Governor’s reply.

To which the only reasonable response is: don’t hold your breath. And definitely, don’t hold your breath if you’re waiting for corporate savings rates to catch up with inflation.

For one thing, the hike took interest rates from 0.25% to 0.5%. Contrast that with inflation. Inflation has hit its highest level since 2012 – having risen from 1% to 3% over the past year, largely due to the fall in the value of the pound, which has made imports dearer.[1]

And now compare that to the average one-year high street savings rate for businesses of just 0.55%.[2]

So contractors shouldn’t get excited that their cash in the bank will soon start making a decent return. In our opinion, inflation will continue to erode the value of cash. Those holding a lot of cash in their business may wish to look for alternative ways to make their money work harder.

Market reaction to the rate hike was telling

The picture gets bleaker for savers when you consider how financial markets reacted to the Bank’s move. Normally, you’d expect a rate rise to result in rising yields (and falling prices) in government bond markets and a strengthening of the currency. But on the day of the announcement, UK gilt prices rose but the pound actually fell.

Why? We’d point to two main reasons. First, markets expected the move. The Bank had, quite sensibly, flagged its intentions well in advance to avoid a market tantrum.

It’s the second reason that suggests rates won’t be climbing in a hurry. Because what the markets hadn’t factored in was the message that accompanied the announcement. The Monetary Policy Committee presented an extremely shallow rate path, explaining that a further two rate rises of 0.25% each over the next two years was probably all that was needed to keep inflation in check. This will create a prolonged low interest rate environment, which is not ideal for savers.

Why the Bank’s in no hurry to rise again

The Bank’s lack of urgency stems from its view that there are two types of inflation:

  1. Good inflation, which takes into account wage inflation – itself an indicator of healthy employment numbers and productivity growth – and which supports consumer spending, a key driver of the UK economy.
  2. Bad inflation, which is imported inflation arising from a weak currency and tends to be temporary in nature. This is what we are seeing today.

The Bank’s approach will therefore likely be to treat today’s inflation as temporary – and so not do much to try and fight it. The Bank is also concerned about the impact Brexit will have, making it cautious about raising interest rates too quickly.

How will this impact you?

November’s 0.25% rise will have little impact on either borrowers or savers and could arguably be considered as no rise at all. And the prospect of a further 0.5% over five years will strike little fear in the hearts of the former nor cheer up the latter.

Meanwhile, the imported ‘bad’ inflation we are seeing today will continue to erode the value of cash, hurting contractors with large cash balances and individual risk-averse savers.

So, if your business is holding a large amount of cash on its balance sheet, you may wish to review this. There are plenty of savings options, and for those comfortable with the additional risks, investment alternatives too. For more information please contact or call 0203 142 4981.

About Octopus Investments

For businesses and their owners, we offer a range of investments, including options for investing surplus business cash and managing wealth tax efficiently. And since 2000, we’ve earned the trust of 50,000 investors with products that do what we say they will. We’re proud to say that we manage more than £7.2 billion on behalf of individuals and businesses like yours, but no matter how big we get, we’ll keep doing the simple things well and keep looking after each of our customers, day in, day out.[3]

Written by Oliver Wallin, Octopus Investments – Investment Director


Important Information

Personal opinions may change and should not be seen as advice or a recommendation. We do not offer investment or tax advice. We recommend investors seek professional advice before deciding to invest. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. 03942880. We may record telephone calls to help improve our customer service. CAM06078. Issued: November 2017.


[2] *The average one-year business savings rate across HSBC, Lloyds and Santander (data collated by Octopus Investments, correct as of October 2017).

[3] Source: Octopus Investments, November 2017.