Social Finance - Slow recovery could mean that interest rates stay low

Says Peter Mitchell writing for Third Sector

Much has been written about the fact that interest rates are at historic lows. With the Bank of England base rate at 0.5 per cent, there is no escaping the fact that it is difficult to get a decent rate of interest on your money. For charities that are already facing fundraising pressures, this is a double whammy because they may also be reliant on interest income to help them deliver services.

There are tentative signs that the downturn could be easing. But as the economy prepares for recovery, what does this mean for interest rates, and what should charities be doing with their money?

The International Monetary Fund has confirmed there are signs of improving conditions and praised the aggressive action taken by the UK, which it has said is on course for a sustainable recovery. Mervyn King, the governor of the Bank of England, believes he has seen some reason for optimism that the pace of economic decline has moderated, although he did point out that the economy would take time to heal.

A consensus seems to be developing that, although the worst of the downturn may be behind us, when the recovery comes it is likely to be slow.

A slow recovery is a key consideration for charities that are wondering what they should do with their cash, because it could indicate it will be a while before interest rates begin to rise again. In such circumstances, reducing the cost of banking becomes as important as interest rates.

Inflation on the consumer price index, the Bank of England's target measure, has fallen to 2.3 per cent in April. Some expect it to fall below 2 per cent later this year, which suggests the bank will not be in a hurry to tighten monetary policy.

At CAF Bank, customers say easy access to money is important and, despite signs the turbulent economic conditions could be easing, that the safety and security of deposits are still the priorities.

Some welcome stability may be returning, but in the medium to longer term it would be a brave person who pinned their colours to the mast. This seems to be true of charities, which in our experience are favouring no-notice variable accounts that give them the freedom to take advantage of any upswing when it eventually comes.

Where you place your money will always be dependent on what you feel will happen in the economy. On balance, a flexible approach in uncertain times can't be a bad thing.

Peter Mitchell
Chief executive
CAF Bank
www.cafonline.org