The MPC’s interest rate cuts have reduced aggregate net interest payments by UK households by 1.8% of their income since the fourth quarter of 2007, according to first-quarter national accounts released last week. This net figure, however, conceals an even larger income transfer from savers to borrowers within the household sector.
Net interest payments peaked at a record 2.2% of gross primary income (i.e. employee compensation plus net property income) in the fourth quarter of 2007 but had fallen to just 0.4% by the first quarter of 2009 – see chart. The 1.8 percentage point decline breaks down into a fall in payments by borrowers of 5.9% of total income, offset by a decline in interest receipts of savers of 4.1% of income.
Expressed in money terms, lower interest rates have given a £60 billiion per annum boost to borrowers’ spending power since the fourth quarter of 2007, financed by a £42 billion cut in savers’ income and an £18 billion loss in the rest of the economy.
Of course, a separation into “borrowers” and “savers” is simplistic because most households have incurred secured or unsecured debt and own some liquid savings. However, it is reasonable to assume that the 32% of households who own their home outright owe little and account for the bulk of savings. (The 32% figure comes from the 2008 NMG Research survey conducted for the Bank of England.)
These wealthy “savers” may also have above-average income. Assuming that they account for 50% of total household income, this would suggest that the group has suffered an income hit of as much as 8% since late 2007 as a result of the collapse in interest rates. On the same rough assumptions, “borrowers” may have enjoyed a windfall of up to 12% of their income.
It might be argued that the income transfer is warranted because mortgage borrowers have suffered a capital loss on their homes. However, this is true only of people who have bought property since 2004 – well under half of borrowers and less than 20% of households. Moreover, savers may have even more wealth tied up in housing than borrowers.
Inflation is often claimed to be bad for savers and good for borrowers. Fear of deflation has had the same effect, by inducing the MPC to reduce interest rates to miniscule levels. The saving ratio has risen recently but this reflects a fall in new borrowing rather than increased financial investment. Savers may understandably feel that the odds are stacked against them.
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