Historically low interest rates are to stay for the next three years at least.
And while that’s good news for mortgage holders and businesses, it’s bad news for government revenues and pensioners who rely on their savings.
Mark Carney, the new governor of the Bank of England, announced last week that interest rates would be held at their present record low level of 0.5 per cent until the UK’s unemployment rate falls to at least 7 per cent.
Under its latest economic forecasts the Bank does not expect this target to be hit until the second half of 2016, suggesting that the cost of borrowing throughout the economy will remain low for three more years.
Paul Chambers, chairman of the Isle of Man Pensioners’ Association, said it would mean a real struggle for those on limited savings and those who do not receive the Manx pension supplement.
He said: ‘Given the views of the new governor of the Bank of England’s statement that interest rates will remain at historically low rates until unemployment falls, clearly there will be an impact on the income of all pensioners who rely on their savings.
‘But for those who are on limited savings and low or fixed pensions and do not receive the Isle of Man Pension Supplement they will be facing a real struggle.
‘Given the much vaunted “Freedom to Flourish”, why are there are so few in government who are concerned about this group?’
Low interest rates impact on government revenues in two ways. Firstly, they mean that less interest is earned on deposits and, secondly, the tax take is reduced if saving rates go down – although that is offset by reduced costs of providing mortgage interest tax relief.
Chief Minister Allan Bell MHK said of the Bank of England’s new policy: ‘It’s good news for businesses and mortgage holders, but for investors and people living off investment income, it will mean a further contraction in income levels.
‘There will be a reduction in the amount of tax revenues to government and further pressure on Treasury revenues at a time when we are struggling to balance the budget.’
Previous Bank of England governor Mervyn King resisted offering any guidance on the future path of interest rates.
But the new policy, described as ‘forward guidance’, aims to give households and businesses confidence that could spur economic growth and jobs creation.