Exclusive: Bank of England Deputy Governor Charlie Bean tells Channel 4 News Britain's savers should "eat into" their reserve cash now to help them survive historically low interest rates.
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The Bank of England has urged Britain's army of savers to "eat into" their reserve funds now to get through the current period of historically low interest rates, saying "in the short term we want to see households not saving more, but spending more".
In an exclusive interview with Channel 4 News, the Bank's second-in-command, Deputy Governor Charlie Bean addressed the fate of 22 million savers who are currently enduring the lowest savings rates in British history and shrinking returns after inflation.
He told Channel 4 News Economics Editor Faisal Islam: "I think it needs to be said that savers shouldn't necessarily expect to be able to live just off their income in times when interest rates are low. It may make sense for them to eat into their capital a bit."
When pressed on why those who had saved carefully and prudently, particularly older savers, seemed to be paying the biggest price for the financial crisis, Mr Bean said he "fully sympathised". But he pointed out that "very often older households have actually benefitted from the fact that they've seen capital gains on their houses".
"It's very much swings and roundabouts. At the current juncture, savers might be suffering as a result of bank rate being at low levels but there will be times in the future as there have been times in the past when they will be doing very well out of the fact that interest rates are at a relatively high level and I think that's something that savers should bear in mind," said the deputy governor.
"Savers shouldn't see themselves as being uniquely hit by this. A lot of people are suffering during this downturn." Charlie Bean
"Savers shouldn't see themselves as being uniquely hit by this. A lot of people are suffering during this downturn."
He said that the current historical lows in the Bank base rate of 0.5 per cent were part of an "aggressive policy" designed to deal with a "once-in-a-century" financial crisis.
Mr Bean, who sits on the nine member committee that votes monthly on interest rates, said that the poor return for savers was not a by-product of this, but the very point of policy.
He said: "I wouldn't want to call it a side effect. I think it's important to realise that actually it's a key way that monetary policy affects the economy by affecting the incentive to save.
"What we're trying to do by our policy is encourage more spending, ideally we'd like to see that in the form of more business spending but part of the mechanism that might encourage that is having more household spending so in the short term we want to see households not saving more but spending more."
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Official statistics suggest that the Bank of England's slashing of interest rates has seen a net boost of £8 billion to UK households per year. But that is comprised of a £26 billion boost to borrowers, and an £18 billion loss of interest income to savers. There are millions more savers than borrowers, and pensioners' groups calculate around five million retirees depend on interest payments on savings.
Mr Bean said it was a "paradox of policy" that despite a longer term view savings rates should be higher than they were in the years leading up to the financial crisis, right now lower savings was part of the point of monetary policy. But the Bank is well aware of the impact of its decisions on savers from its postbag.
"The Governor [Mervyn King] gets more letters from savers complaining when we put interest rates down than he does from borrowers when we put rates up," said Mr Bean.
The Bank of England has kept base interest rates at 0.5 per cent for a year and a half. The next decision will be made next week.
The "savings squeeze" is one of those fundamental changes to the way the UK economy works, which is rarely discussed or debated. It is the organic, natural, unavoidable consequence of attempting to save the economy from the ravages of a once-in-a-century financial crisis.
But the slashing of interest rates and printing of money does have a clear distributional impact.
Put simply, at least temporarily, savers have been crushed at the expense of borrowers. The prudent have been sacrificed at the altar of the feckless. Pensioners who have saved meticulously for a modest retirement have lost thousands from their annual income, whereas buy-to-letters with ten properties and a tracker mortgage have gained thousands per month.