There are many things unprecedented about the times we are currently living in. Never before has the government provided such substantial and comprehensive financial support to the British public, nor have we been confined to our homes like this since the Spanish Influenza of 1919. The challenges presented by this pandemic have required drastic and innovative action across areas of policy, planning and engagement.
Two areas of policy are particularly crucial at this time, known as fiscal and monetary policy. The government is responsible for fiscal policy, setting the appropriate rates of taxation and spending on different projects. Ultimately, the current circumstances require huge spending from the government, since people are not able to contribute to the normal functioning of the economy as per usual; this is known as loose fiscal policy. Examples of this include the furlough scheme where the government will match up to 80% of salaries, or support for self-employed people (for more information about government support available at this time, please click here). The government is currently spending far more than it will be able to recoup in taxes, likely leading to a significant budget deficit and increased debt, since this spending program likely needs to be financed by sovereign debt.
Monetary policy is the responsibility of the Bank of England. The BoE typically has two channels through which it can influence the economy; interest rates and quantitative easing. The interest rate that the central bank sets is known as the base rate, and it is the rate at which it lends to high street banks and other institutional borrowers and savers. Since 2008, the rate has remained extremely low in an attempt to get people and firms borrowing and spending again after the financial crisis; the lower the interest rate is, the cheaper it is for consumers and businesses to borrow money to finance expenditure.
Historic UK Base Interest Rate
Quantitative easing can be considered as a liquidity injection into the economy. It essentially acts as a large scale cash injection to the UK economy, whereby the BoE will buy bonds issued by corporate institutions and banks, providing extra liquidity at a time when other private lenders might be put off due to rising risk levels. Hence, the central bank is often known as the lender of last resort.
As of May 2020, the BoE base rate sits at 0.1%, with current quantitative easing remaining at £645 billion. In reality, historically low interest rates over the past decade may prove to be an issue, since there is limited room to move downwards before the rate hits zero, which is known as a liquidity trap. Nonetheless, the unprecedented nature of current economic conditions is leading some analysts to predict that we will see negative interest rates within a few quarters, leading to the bizarre situation whereby the central bank is effectively paying institutions to borrow money. Although rare, countries such as Switzerland and Japan have used the tactic in the past to try to boost economic growth, with mixed success.
Whether interest rates are low or negative, at this time consumers are looking at historically low returns on their savings, which is why investing their money might be a better option if they are looking for a higher growth rate. This is in addition to the fact that inflation has dropped significantly to an estimated 0.8%– this means that investments are performing better in real terms, since the rate at which inflation erodes returns is lower.
Here at Yielders, we are working hard to adapt to the changing conditions, looking to provide investment opportunities that combine both sustainable returns and peace of mind for our investors. As a platform offering alternative investments, we have worked hard to offer assets that differentiate themselves from general market performance. We aim to mitigate the effects of macroeconomic turbulence through sticking to our core principles, which prioritise conservative projections; acquisition at below-market value without the use of leverage or traditional financial products; and the provision of consistent yields through asset-backed equity investments. Have a look at our website today or get in touch with the team via email (email@example.com) to find out more about how we work to provide competitive returns, without requiring you to compromise on your values.