The announcement of the most recent interest rate cuts by the European Central Bank and the Bank of England must have been music to the ears of business borrowers and people with oversized home loans. But one of the paradoxes of the prevailing economic crisis is that those who have been most prudent with their finances in the past several years are being penalised undeservingly.
Savers are the backbone of any economy. Their frugality, irrespective of what motivates it, means that banks can mobilise their savings to help industry. And, yet, when borrowers face tough times, as they are doing at present, Central Banks quickly react by pushing down interest rates to ease the burden of old and new borrowing.
Little consideration is being given to how the current historically-low interest rates are affecting savers. Savers come from different sections of the population but they are predominantly aging people who understand the importance of putting aside the little extra cash that they have to build a cushion of finance to ease their retirement.
These people now have to cope with falling interest rates on their savings that, in many cases, do not even cover the rate of inflation. Some are probably facing even bleaker prospects because they have very likely suffered massive losses in their holdings in equities and bonds.
The quality of life of aging baby boomers is bound to suffer for many years to come because many of them no longer have the option of working for more years to make up for these losses. The big risk, of course, is that many will opt to move from the safe haven of bank deposits into the more risky junk bonds and equities where loss of capital becomes a real possibility.
Luckily, most savers no longer have home loans to repay, even if many are helping their children to repay their own loans as a result of the very high cost of acquiring a new home. It is therefore important that whenever rate cuts are announced the interest of savers is taken into consideration.
Interest rates have become so low that a further half percentage point reduction is not really going to have such a huge economic impact on industrial borrowers. Many economists in fact argue that the savings culture should not be penalised by showing lack of sensitivity to the plight of savers who forgo consumption today to build a buffer against financial hardship tomorrow.
One can therefore see the merit of banks not reducing any further interest rates paid on deposit accounts of savers. In the local context this is even more important because the inflation rate remains stubbornly higher than the average in the eurozone.
It is just as important for the financial regulators to promote an educational campaign to inform the public about the correlation between risk and reward. Many savers are taking unprecedented risks by buying bonds and shares that promise above-average returns but that could easily deliver above-average erosion of capital.
Such advice should be objective, simple and easily accessible. More important, it should not be left in the hands of some financial advisers who see no contradiction in giving sound advice in investment seminars that they organise for their clients only to resort to hard selling tactics when the opportunity to make a quick profit becomes irresistible.
Ultimately, promoting the interest of savers is equivalent to promoting the interest of the economy.