Brexit chaos is bad news for UK savers. Here’s why

The Motley Fool
union jack flag and iconic Big Ben at the palace of Westminster, London
union jack flag and iconic Big Ben at the palace of Westminster, London

It’s hard to deny that Brexit is a complete shambles at the moment. At this stage, nearly two-and-a-half years since the EU Referendum and only 130 days before the UK is set to leave the EU, no one has any idea whatsoever what’s going on with Brexit. Will the UK actually leave the EU? What will the deal (if any) look like? Will Theresa May stay on as Prime Minister? These are questions that no one can answer right now.

Investors hate this kind of uncertainty and, recently, we’ve seen plenty of UK-focused stocks sold off. For example, in a little over a week, Lloyds shares have fallen nearly 8%.

Yet it’s not just stock market investors who are likely to be impacted by Brexit uncertainty. Cash savers are also likely to be affected, as the uncertainty could have an impact on UK interest rates, and subsequently influence the rates that are available on savings accounts. Here’s my thinking on why.

Interest rate freeze

The UK economy is actually in decent shape at the moment. Economic growth is solid, unemployment is at its lowest level since the mid-1970s, and wage growth is strong. Normally, these conditions might be enough to warrant another interest rate hike, and only recently, economists were forecasting another hike of 0.25% (or possibly even two) next year.

Yet the Brexit chaos in the last week (including the resignation of Brexit Secretary Dominic Raab) has changed the outlook for UK interest rates dramatically, and City traders have pared back their expectations for near-term rate hikes. Now, the market is not expecting another increase in interest rates until January 2020, meaning the UK rates could stay at 0.75% throughout the entirety of next year. “The market clearly thinks that in the event of a no-deal, the Bank would cut rates,” advised Rob Wood, UK economist at Bank of America Merrill Lynch.

Clearly, this is bad news for savers. Just when interest rates were beginning to rise, and the interest rates on cash savings products were moving higher, Brexit political chaos looks like it may throw a spanner in the works. Another few years of rock-bottom savings rates would be nothing short of a disaster for UK savers.

Protect your wealth

However, it’s possible to protect your wealth, to a degree, in the current environment. While the interest rates from savings accounts could stay low for a while, there are ways to generate higher yields on your money, and protect your hard-earned savings from Brexit uncertainty and inflation.

One example that comes to mind is multinational FTSE 100 dividend stocks. You see, plenty of multinational FTSE 100 companies are offering dividend yields of 5% or more right now, meaning that investors can pick up yields that are much higher than cash savings rates. And the key advantage of these global companies is that they offer a degree of insulation from Brexit because they have operations all over the world. Indeed, if the pound was to fall further, the share prices of these companies may rise as the value of their international earnings increase in sterling terms.

Of course, it’s important to realise that stocks are higher risk than cash savings. Yet leaving money sitting in an account earning 1%-1.5% is not entirely risk-free as, over time, it will lose purchasing power due to the effects of inflation.

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Edward Sheldon owns shares in Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.