Squeeze continues on household finances as BoE hikes rates to 4%

Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, comments on the Bank of England decision to increase interest rates to 4% (a rise of 0.5 percentage points), showing the squeeze continues on household finances.

Helen Morrissey says:

“Today’s interest rate hike piles further pressure on people who are already struggling to make ends meet due to surging living costs. Interest rates now stand at 4% -the highest seen since October 2008.

“This isn’t necessarily high by historical standards but there are a lot of people out there who have only really known interest rates at record low levels and the speed of the increase has come as a nasty shock.

“There are some positives on the horizon, inflation is coming down, albeit extremely slowly and many believe interest rates will peak at 4.5% later this year before falling back.

“However, this is no comfort for those who are already struggling and the prospect of further hikes on the horizon will leave people extremely worried about how they will cope in the coming months.”

Mortgages:

“The clobbering continues for people on tracker and SVR mortgages who will feel the impact of this rate rise straightaway.

“Recent data from Moneyfacts put the average SVR at 6.64% in January, so if this rise is passed on, we are looking at rates close to 7%.

“As the chaos of the mini-Budget recedes, people looking to fix will get a better deal than they’d have got late last year.

“According to Moneyfacts, the average two- and five-year fixed rates fell to 5.79% and 5.63% respectively. These have come down but remain significantly higher than they were two years ago. Some may be tempted to hold fire and see if they recede further in the coming weeks but faced with the spiralling costs of staying on an SVR or tracker, they may decide now is the time to fix.

“Those who remain in fixed rate deals remain protected for now, but homeowners whose deal ends any time soon will be worried as the market they remortgage in will likely be very different – and a lot more expensive.

“And they will need to brace themselves to absorb higher costs.”

Savings:

“An interest rate hike should be good news for savers, but the reality is it’s much more complicated than that. Interest rates on savings accounts in the biggest banks have increased over the past year, but only slightly.

“There’s no obligation to pass on interest rate rises to savers, so this means many have only passed them on in part and at a very slow rate.

“Even if they decide to pass on today’s rate increase, we may not see any movement in interest rates for several weeks.

“If you are prepared to do a bit of research, there are better deals on offer.

“You can get up to 3% on easy access accounts and today’s rate hike could see them move up further. If you are willing to tie up your money for a period of time, then you can get more again.

“However, the sense is growing that we may be past the peak with fixed term rates. They are essentially forward looking, and today’s rate increase was largely trailed so is largely already priced in.

“Added to this is the expectation that rates are expected to start coming down later in the term and so we could see the rates on offer start to come down.”

What’s next?

“After months of soaring inflation, the good news is that it looks like it has peaked with the expectation being that it will start to head downwards, hitting around 4% towards the end of the year before going below the bank’s 2% target.

“However, it is important to understand that this doesn’t mean prices are falling – they are rising more slowly so the pressure on our pockets remains.

“With lower inflation comes the prospect that we are coming to the end of a punishing cycle of interest rate increases that have pushed up the cost of servicing loans and credit card debt, as well as mortgages.

“In the minutes, it was interesting to read that two members of the MPC thought the bank’s previous rate increases were still helping to bring down inflation and so they were hesitant to press ahead with another.

“However, the outlook remains for interest rates to hit 4.5% later this year before heading back down so we need to brace ourselves for further increases to come.”

Kindly shared by Hargreaves Lansdown

Main article photo courtesy of Pixabay