Interest rate hits 1%: what it means for you, and what next as inflation set for 40-year high
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, comments on the 1% Bank of England interest rate rise: what it means for you, and what next as inflation set for 40-year high.
Key points from announcement:
- The Bank of England Monetary Policy Committee has raised rates to 1% – the highest in 13 years.
- What it means for mortgages, credit cards and savings.
- What the Bank of England forecasts is next for inflation and rates.
Sarah Coles said:
“Inflation is set to peak at an eye-watering 10% this year – a level we haven’t seen since 1982. It means there’s a good chance we haven’t seen the end of rate rises. Already, despite maintaining a slow and steady pace of fractional rate rises, the combined impact of four rises in five months is catching up with us.
“The Bank of England predicts the spending power of our income will fall 1.75% during the year, leaving us all struggling, and life is going to get even harder for borrowers. Those with large variable-rate mortgages could find their monthly payments have risen by £100 or more since December. Fixed-rate borrowers are shielded from the impact of the rises for now, but when they come to remortgage, it will hit them in one, knock-out blow. Meanwhile, credit card costs and new loans will continue to creep up, so anyone borrowing to stay on top of rising prices will pay an even higher price for it.
“For savers, on paper, rate rises are great news. Unfortunately, someone needs to let the high street banks know, because they’re dragging their feet in passing these rates on. There are some bright spots among newer and smaller banks, so it’s well worth switching for a better deal.”
What it means for you: mortgages:
“Banks will be falling over themselves to pass on the rise to variable rate mortgage customers before the ink dries on the Bank of England announcement. In fact, Halifax fell over its own shoelaces and accidentally announced its rise before the Bank of England’s decision.
“If you’re one of the 1.1 million people on a standard variable rate mortgage, or one of the 850,000 with a tracker, your costs will rise. Someone with a £300,000, 25-year, repayment mortgage on the average SVR could see their monthly payments go up by over £40 a month. And while in isolation this doesn’t sound like an impossible stretch, the steady ratcheting up of rates since December will be taking a toll.
“Three quarters of mortgage holders are protected by a fixed rate mortgage, but while they’ll be reaping the benefits during the fixed period, it means they’ll feel the impact in one fell swoop when their mortgage expires. The Bank’s efforts to bring in rates gradually and smoothly will be no use to anyone who remortgages and sees their rates jump overnight. 1.5 million of these fixed rates are set to expire this year.
“If you have six months or less left on your current mortgage deal, you can apply for a remortgage rate today, and lock in a deal in case rates rise again. If you have longer until your fix comes to an end, there’s time to plan for how you’ll cover the extra costs. Ideally, you’ll be able to track down costs to cut elsewhere in your budget, to free up more cash for your mortgage.
“You could even do that now and overpay on your mortgage, to limit the impact of future rate rises. If you’ve cut every cost possible, when the time comes you may be able to extend your mortgage, so your monthly payments are still manageable. However, this will mean paying more interest over a longer period, so it comes at a cost.”
What it means for you: credit cards:
“Credit cards feel like they can’t have anything to do with the Bank of England, given the massive gulf between a 1% base rate and an average card rate of 18%. However, the cost of doing business is one of the factors lenders consider when setting rates, so when rates rise, they’ll often be passed directly onto credit card holders.
“This is going to affect more people too, because the Bank of England showed record spending on credit cards in February, and another £800 million loaded onto plastic in March. Meanwhile, the Money Advice Trust found that one in four people have used credit cards to pay bills or for essentials in the past three months. And ONS data today showed that card spending on staples was a quarter higher than pre-pandemic levels.
“Those with debts should shop around and check if they can get a more competitive deal. Before you apply for a cheap deal, it’s worth using the Moneysavingexpert credit card eligibility tool, which will give you an idea of whether you will qualify, without doing a full credit check that shows up on your credit record. However, we all need to think carefully before we spend anything on our cards. It can feel like a handy emergency solution to rising prices in the short term, but once you have debts to repay and interest building up, it quickly becomes yet another part of the problem.”
What it means for you: Savings:
“Rising rates bring some good news for savers, but not enough of it. The high street banks have been dragging their feet in passing higher rates on when it comes to savers, preferring to bolster their profit margins instead. That said, months down the line from the first rate rises, we’re finally getting a bit of movement.
“Bank of England figures show that in March, the rate on the average new fixed-rate savings account rose 0.15 percentage points to an average of 0.92%. The average easy access rate crept up 0.02 percentage points to 0.12%. It’s a step in the right direction – albeit a baby step.
“The problem is that during the pandemic, our lockdown savings found their way into the coffers of the high street banks, who now have so much cash that they don’t need to push up rates to attract more. It also means they can keep new fixed rate mortgages relatively low, and because their smaller competitors have to try to offer comparable mortgage rates, it has limited their ability to compete in the savings market too.
“Fortunately, there are some bright spots for savers to celebrate. Some hungrier and smaller new banks have been gradually increasing their rates to build their books. The most competitive fixed-rate accounts over one year are now paying over 2%, and the best easy access accounts have also been on the rise, with several paying well over 1%. Today’s rise was pretty much baked into the fixed rate market, but there’s a strong chance of some movement among easy access accounts. Yesterday, Gatehouse Bank made an early move to offer 1.3% – the highest rate for easy access with no strings attached.
“That doesn’t mean the rises will find their way into every bank. The high street giants are still largely only offering 0.1% on easy access savings, so it’s well worth shopping around for a better deal.
“If you’re thinking of tying your money up for a period in return for a higher interest rate, you might be tempted to sit tight given that rates are rising at the moment. However, we’re going to be in an environment of rising rates for some time to come, so there’s a risk of being trapped in a wait-and-see cycle; constantly waiting for something better to come along. One option is to fix for a relatively short period to take advantage of today’s rates, and then fix again for even more interest when that rate expires.”
What next?:
“We can expect to see more of the same in the coming months, as the steady drip-drip of gradual rate rises builds to a wave of higher debt costs.
“The Bank forecast for inflation makes grim reading. It’s now predicting it will hit 9% in the summer and then rise to over 10% at its peak at the end of this year – driven by rising energy bills. This is going to take a terrible toll on millions of people, who face an impossible challenge in meeting these rising costs, and the Bank expects wages to fall well behind, losing 1.75% of their spending power this year. We haven’t seen inflation at 10% in 40 years, so we’re facing the biggest cost of living crisis in a generation.
“There’s a serious question about how much impact rate hikes can have, when so many price rises are dictated by essentials that we’ll still need regardless. There’s also the issue of imported inflation – particularly from higher oil and gas prices – which is beyond any of our control. However, the Bank can’t just sit on its hands with inflation running so hot.
“On the flip side, it’s also bound to be worried about growth. A wave of weaker data has raised the spectre of stagflation – where we get higher inflation alongside a shrinking economy. The MPC actually expects the economy to shrink in the last three months of this year. The Bank will be working hard to tread a delicate balance between raising rates enough to keep a lid on inflation, without raising them too far or too fast.
“This tension between growth and inflation is why although the market has priced in rate rises to 2.5% by the middle of 2023, there’s a chance we won’t see them get to quite this point.”
Kindly shared by Hargreaves Lansdown
Main article photo courtesy of Pixabay
