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Cash savers to suffer bigger squeeze than in the Seventies as inflation outstrips interest rates

Cash is not storing value particularly well right now, as real interest rates are in negative territory - Copyright ©Heathcliff O'Malley , All Rights Reserved, not to be published in any format without p
Cash is not storing value particularly well right now, as real interest rates are in negative territory - Copyright ©Heathcliff O'Malley , All Rights Reserved, not to be published in any format without p

Inflation is eating away at cash savings as low interest rates leave bank accounts under the cosh, and the squeeze is set to be even bigger than the crunch suffered by savers in the Seventies.

The peak-to-trough squeeze 40 years ago meant the real loss on cash – the cumulative gap between the base rate of interest and the RPI inflation measure – amounted to 27pc. So far since 2009 the squeeze has amounted to 20pc, and shows no sign of ending.

Trevor Greetham, Royal London Asset Management’s head of multi asset, believes this will continue for years to come. “On average, cash will continue to burn a hole,” he said. “It is going to be worse than the Seventies. You’ve only got another 7pc to go and it will equal the Seventies, and I just don’t see this ending in the next five to 10 years.”

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The Seventies inflation included an oil price shock that faded in time.

By contrast, Mr Greetham says this is a policy choice that sets Britain up for a cycle in which interest rates remain at historically low levels.

“It is more business as usual,” he said. “This is normal settings, monetary policy is set with negative real interest rates.” At its most extreme, a depositor putting £1,000 in cash in 2009 would have a sum worth £800 in today’s money, on Royal London’s sums. Savers in other assets are doing rather better.

So far through 2017, investors in emerging market stocks are up by 20pc, global equities investors have made gains of 10.8pc, while UK shares have risen by 8.2pc.

As well as “the curse of long-term cash”, Mr Greetham identified other features of current financial markets. He believes the recent bull market in stocks is not likely to end any time soon, despite regular fears that the extent of new high prices must lead to a crash.

It is thought that central banks are unlikely to tighten monetary policy sharply, which would threaten to kill the bull market. In addition investors have retained relatively high cash levels, meaning they have more funds to invest, and have kept a degree of caution about them.

Geopolitical risks have garnered a lot of attention but failed to take the wind out of the markets’ sails for any meaningful length of time. But any investors looking for a so-called soft Brexit to boost markets could be disappointed – RLAM expects this to support the pound and dent the FTSE 100.

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