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Spend not save to help the economy

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Consumers should look to spend rather than save, the deputy governor of the Bank of England has said.

Charlie Bean, who sits on the Bank’s rate-setting Monetary Policy Committee, argued that the base rate is being suppressed at a historic low of 0.5 per cent as a way of encouraging more to people to spend in an effort to reinvigorate the economy.

The same low base rate is currently penalising savers with very low returns on their money.

Mr Bean conceded that low interest rates could be a feature of the monetary landscape for some time into the future.

The low cost of borrowing has meant that those who take out loans have gained by as much as £26 billion, while savers have forfeited as much as £18 billion in returns.

In a television interview, Mr Bean said: “What we’re trying to do by our policy is encourage more spending.

“Ideally we’d like to see that in the form of more business spending, but part of the mechanism that might encourage that is having more household spending; so in the short term we want to see households not saving more but spending more.”

The deputy governor continued: “I think it needs to be said that savers shouldn’t necessarily expect to be able to live just off their income in times when interest rates are low. It may make sense for them to eat into their capital a bit.

“It’s very much swings and roundabouts. At the current juncture, savers might be suffering as a result of bank rate being at low levels, but there will be times in the future (as there have been times in the past) when they’ll be doing very well out of the fact interest rates are at a relatively high level. I think that’s something that savers should bear in mind.

“Savers shouldn’t see themselves as being uniquely hit by this. A lot of people are suffering during this downturn.”