Interest rates look set to remain at record lows for perhaps another three years following the new Bank of England Governor Mark Carney's announcement that they will be linked to the rate of employment.
In a major shift in monetary policy, the new governor said rates will not rise until the employment rate drops to 7%, which he does not expect to happen until 2016. This "forward guidance" strategy is aimed at giving households and businesses clarity on the future of interest rates, which will remain low to bolster economic recovery.
Bank of England Base Rate has sat at just 0.5% since March 2009.
Mortgage Holders
The announcement will reassure borrowers fearful of potential rate rises. However, only those on mortgages where the rate they pay is linked to the base rate - trackers and standard variable rates (SVRs) explicitly linked to the base rate - can relax, although it should be remembered that most lenders reserve the right to change their SVR when they want, even if interest rates don't change.
Those on a variable rate, particularly if their loan is linked to their lender's standard variable rate, could consider locking into a fixed deal, but with the possibility of further cuts in mortgage interest rates, some borrowers may bide their time.
Even so, a longer-term fixed rate mortgage perhaps looks more attractive than a two-year fixed-rate deal after Mark Carney's words, and rates on five-year deals seem very competitive at present.
Savers
Savers will be acutely aware that rates have plummeted in recent years, made worse by the introduction of the Funding for Lending scheme a year ago, which gave lenders access to cheap finance to help borrowers and made them less reliant on attracting savers' deposits.
It is already almost impossible to find savings rates that beat inflation and things are not likely to improve in the foreseeable future and those most negatively affected by Mark Carney's proactive stance are generally savers.
The bank seems willing to tolerate above-target inflation over the next few years, meaning real interest rates will remain negative and rates on cash deposits aren't going to rise anytime soon, certainly not significantly for three years it seems, although when Funding for Lending ends in 2015 things could start to get better.
Retirement Planning
If you are about to retire you may use your fund to buy an annuity. Forward guidance has made what will happen to annuity rates clearer, but unfortunately it has made it clear that they are unlikely to improve for at least three years.
For those with a small pension pot or who need certainty, it may now make sense to get on with buying an annuity, but investors with larger pension pots who can maybe tolerate some investment risk, it could make sense to park the idea of buying an annuity for a few years and look at income drawdown instead.
If any of these areas are a concern to you, as always I would encourage you to seek out professional independent advice.
