Rates rise to 0.25%: high street banks will clobber borrowers and neglect savers

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, discusses the Bank of England rates rise, which suggests high street banks will clobber borrowers and neglect savers.

Key points for consideration:

• The Bank of England says inflation is expected to rise to stay around 5% this winter and peak at 6% in April – when the energy price cap rises.
• Jobs data isn’t showing any sign that the end of the furlough scheme sparked redundancies, so it now expects unemployment to be 4% in the last three months of the year – down from 4.5% in its report last month.
• GDP forecasts for the last quarter of the year have been cut by from 1% to 0.6%,  as supply chain problems and labour shortages have continued to thwart businesses. Omicron may well exacerbate this, as more people are isolating and social distancing.
• The last time we had a rate rise (August 2018), only one in ten banks raised savings rates within a week, and only a small fraction of them passed on the rate rise in full. Meanwhile 28% of banks raised mortgage rates.

Sarah Coles said:

“The high street banks will clobber mortgage borrowers, hiking their variable rates to the max as quickly as possible. Meanwhile, savers will grow old waiting for them to pass on rises in savings rates. And while we won’t see a vast number of accounts from other providers boosting rates overnight, there are better deals available for those who are prepared to shop around.

“High street banks have suffered a couple of years of horribly squeezed margins, with rock bottom rates leaving them little room to manoeuvre. They’re likely to see this as an opportunity to get a bit of breathing space, and expand those margins, hiking costs for mortgage borrowers and leaving savers hanging.

“Given that growth was only marginally lower than expected, unemployment fell and inflation was much higher than anticipated, the bank felt they had no alternative but to raise rates.

“With Omicron on the rise, they’re not entirely certain what impact it will have on global economies, but so far each successive wave has had a smaller impact than the last, so 8 out of 9 members of the committee decided that the need to nip inflation in the bud trumped Covid-related concerns – particularly given that there was a chance it could actually add to inflationary pressures. Only one member of the committee called for rates to remain where they were while the full impact of Omicron became clear.”

Mortgages:

“The pain for around 2 million mortgage borrowers on variable rates will be swift. It’s not going to mean particularly eye-watering rises, and UK Finance figures show the typical SVR customer would pay just under £10 more a month. However, this is unlikely to be the last of the rate rises. If rates go up to 1%, that boosts the typical SVR customer’s monthly payment by £57, which is a difficult sum of cash to find, particularly when prices are rising on all sides.

“Borrowers affected by hikes should consider remortgaging as soon as possible. In many cases a fixed rate deal looks like a sensible option, and it’s worth considering a longer fix. Rates had already gone up ahead of the rate rise, but we’re still around historic lows, so now is the time to act. If you’re on a fixed rate with less than six months left to run, you can book in a new rate now, so don’t wait for your deal to expire.”

Savers:

“Savers on the high street may well see no change at all for now, as banks luxuriate in bigger margins instead. They’re unlikely to see much movement in the wider savings market, but they should fight the temptation to stay put and wait for more rate rises over the next 12 months, because there are much better deals out there.

“Banks aren’t in desperate need of more financing. They’ve had a good run of cheap money from the government, and now the heat is coming out of the housing market, they don’t need the same level of cash to support the mortgage market, so there’s not a tremendous sense of urgency to race for the top of the savings charts.”

Kindly shared by Hargreaves Lansdown

Main photo courtesy of Pixabay