Rates hold at 0.1% – for now – but high street savers and borrowers can’t afford to wait for a rate rise
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, comments on Bank of England decision not to implement a rate rise, suggesting high street savers and borrowers can’t afford to wait.
Key points:
- The Bank of England says inflation is expected to rise to just under 4% in October and 4.5% in November, before peaking at 5% in April.
- However, there are some weaknesses in the economy. Unemployment is likely to rise slightly at the end of the year.
- Keeping a balance between controlling inflation and protecting growth means the Bank held off hiking rates in November, but rises are expected shortly, and rates are expected to hit 1% by the end of 2022.
- 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. Something similar is likely when we next get a rate rise.
Sarah Coles said:
“Wait-and-see savers were left hanging by the Bank of England, which kept rates at 0.1%, while mortgage borrowers on trackers and standard variable rates may feel like they’ve had a reprieve. But neither borrowers or savers can afford to hang around waiting for a rate rise: they should act now.
“The Bank is still likely to raise rates in the near future. Inflation is still on the up, and is expected to peak at 5% in April, putting the bank under pressure. It’s balancing this against some signs of weakness in the economy. Unemployment is likely to rise slightly at the end of the year, partly because 1.14 million people were on furlough when the scheme ended. Growth is also expected to be hampered by rising prices and supply bottlenecks.
“It means the bank is cautious about rises, and while the market expects the first hike to be around the corner, and for rates to hit 1% by the end of 2022, there are no guarantees. It means savers and borrowers shouldn’t hang about.“
On mortgages:
“Around 2 million borrowers on variable rates may be breathing a sigh of relief, but it doesn’t mean they should wait for a rate rise: they should consider fixing their mortgage now. We’re expecting the Bank of England to start raising rates imminently and continue through 2022, so variable rates will head northwards soon.
“Rates have already started to 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.“
On savers:
“Wait-and-see savers who were hanging on for better deals after a rate rise could be in for a far longer wait then they expect. Even when we do get a rate rise, the high street banks are highly unlikely to pass them on. And they don’t need to wait to get a better deal.
“The banks 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. Meanwhile, they’ve suffered a couple of years of horribly squeezed margins, with rock bottom rates leaving them little room to manoeuvre. It means they’re likely to see any rises as an opportunity to get a bit of breathing space, so they’re unlikely to raise rates.
“Some smaller and online banks will buck this trend, and some rates will creep up among the smaller and online banks, but not dramatically so, and not for some time.
“Fortunately, it doesn’t take a rise in savings rates for there to be a better deal out there than a high street account. In the past six months we’ve seen the rates on competitive short-term fixed accounts almost double. It means there are far better deals out there for anyone willing to shop around.”
Kindly shared by Hargreaves Lansdown
Main photo courtesy of Pixabay
