The Bank of England (BoE) raised interest rates for the second time in as many months yesterday. Policymakers’ decision to lift its benchmark to 0.5% has offered a speckle of hope for savers who’ve suffered poor returns on their cash for years.
As someone who holds a couple of savings accounts, I’m encouraged by today’s news. But I’m not punching the air with glee just yet. I don’t expect today’s decision to be a seismic event in what banks and building societies offer to savers.
Savings rates to remain low?
Today’s rate rise by Threadneedle Street is unlikely to be the last as inflation in the UK rockets. Indeed, the BoE now expects the CPI to move to 7.25% in April, it said on Thursday.
So it’s probable that further interest rate rises will be coming down the pipe. Because of this, savers should probably expect interest rates on their accounts to move higher.
The big question however, is whether the returns on offer from standard savings accounts will improve considerably from current levels. It’s my belief that the answer is no.
BoE governor Andrew Bailey has commented that its benchmark is unlikely to return to pre-Covid levels and that low rates are here to stay. So savings rates are unlikely to improve measurably.
Why I’d rather invest in stocks
This is why I plan to continue buying UK shares with my leftover cash. I’ll continue to hold a certain amount of capital in a savings account. Their low risk means they’re a good place to hold money for a rainy day, or just before making a big purchase.
However, I’ll continue to use stock investing as the primary method of making my money work for me. History shows us that long-term share investors — those who buy to hold stocks for a decade or more — tend to make an average annual return of 8%, although that’s not guaranteed.
Some UK shares I’d buy right now
I believe buying stocks is a particularly good idea in this era of high inflation. Companies whose products have immense pricing power like Diageo and Coca-Cola HBC should remain strong even if inflationary pressures persist, providing me with decent protection.
Precious metals producers like Polymetal International and Fresnillo can also expect the value of the safe-haven assets they produce to rise too. And property stocks like student accommodation provider Unite and warehouse owner Urban Logistics REIT can expect the rents they charge to increase too.
Of course, I have to be careful with how I use my cash to buy shares. Rising costs can hit the profitability of many stocks very hard. But some good research can help me find shares that could thrive — and deliver excellent returns to investors like me — even if inflation remains at elevated levels.
