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Savers should 'use their reserves'

Savers should be ready to "eat into" their reserve funds to help them through the current period of low interest rates, a senior Bank of England official has said.

Deputy Governor Charlie Bean said that the Bank was deliberately keeping rates low in the hope that British families will go out and spend money to inject vigour into the economy.

He appeared to indicate that historically low interest rates could continue for years rather than months, saying only that he would not expect them to remain close to zero for a decade or more.

The Bank of England has kept base interest rates at 0.5% for a year and a half. The next decision will be made next week.

The record low rates have helped mortgage-holders during the recession - particularly those on tracker deals - but have made life difficult for people who rely on income from savings, many of whom are pensioners. Official statistics suggest that borrowers have gained by around £26 billion, while savers have lost out to the tune of £18 billion in reduced interest.

Mr Bean, who sits on the Bank's Monetary Policy Committee which sets interest rates, told Channel 4 News: "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."

Mr Bean said he "fully sympathised" with savers who are losing out from the low rates.

But he added: "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."

Many of those facing a squeeze because of lower rates were "older households (which) have actually benefited from the fact that they've seen capital gains on their houses", he said. "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 will be doing very well out of the fact that interest rates are at a relatively high level and I think that's something that savers should bear in mind."

Asked if near-zero interest rates were now "the new normal", Mr Bean said: "I would certainly not expect the level of bank rates to stay very close to zero for a decade or more."

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