The Bank of England has raised rates from 4.25% to 4.5% – their highest levels in almost 15 years – which means mortgage and loan costs will rise for many, although some some savers may have cause to be thankful.

 
Interest rates have been pretty much the only lever available for the Old Lady to pull, to try to drive down what is proving to be pretty sticky inflation; however, the Bank’s Governor, Andrew Bailey, says the UK is no longer expected to go into recession.

High inflation, largely driven by the soaring cost of energy, has pushed prices up leaving many people struggling with the cost of living, although Mr Bailey also said average energy prices are expected to drop to £2,100 by the end of the year.
 
Here are some early reactions from around the world of finance:
 
Mohsin Rashid, CEO of ZIPZERO, said: “The Bank’s twelfth consecutive interest rate hike means more misery for the British people.

“Among those hit the hardest are homeowners with variable-rate mortgages, who will once again see their repayments surge. This comes as an estimated 700,000 households missed mortgage payments or rent last month. Undoubtedly, this decision will lead to inevitable repossessions.

“But it does not stop there: with inflation forcing many Britons to become increasingly reliant on borrowing to simply put food on the table – families will be forced to make more sacrifices.

“Households have shown a remarkable ability to adjust their shopping habits to reduce overall expenses. But the government must now act and provide a life raft for those struggling to stay afloat amid heavy price rises from every direction. In the meantime, I urge consumers to continue to find novel money-saving solutions that can reduce their spending and lower their bills.”
 

Sarah Pennells, Consumer Finance Specialist at Royal London says BoE’s base rate rise is a worry for homeowners: “Just when it looked like the worst of the cost of living crisis might be over, along comes another hike in interest rates.

“Around a million households are due to come off cheap fixed rate mortgage deals between now and the end of the year, and many face a massive shock to their personal finances when it comes to getting a new home loan.

“The majority will have borrowed at rates below 2%, but now face rates of more than 4% when they look to secure a new deal.

“It’s not just owner-occupiers who are suffering. The impact of rising interest rates has been particularly acute in the private rental sector where tenants have seen a huge spike in rents.

“Many landlords have exited the sector recently and those who remain may feel they have little choice but to pass their increased finance costs onto tenants.

“The result is that private renters are now paying more of their disposable income on housing costs than mortgage holders.

“Rates on savings accounts have been increasing in recent months, but don’t generally rise as quickly as mortgage rates. Anyone with money in a savings account, should check the interest rate they are receiving and see if it makes sense to move their money to get a better rate.”

 
Oliver Faizallah, Head of Fixed Income Research at Charles Stanley, comments: “In line with expectations, the Bank of England hiked base rates by 25 basis points, from 4.25% to 4.50%, as inflation remains in the double digits. This hike was the same in size as the Federal Reserve and European Central Bank last week, however the Bank of England remains in a uniquely difficult position. While inflation in the US continues to head in the right direction, UK headline inflation remains persistently above 10%, and core inflation is well above target at over 6%.

“Going forward, the Bank of England have a very difficult job, navigating high inflation with a fragile economy. The Bank is likely to remain data dependent as they decide whether to pause or keep hiking. Policy makers and market participants will be looking closely for signs that show that the UK economy is finally giving in to the pressure of all the hikes to date, which would give them confidence that inflation will fall back to target sooner rather than later.

“Consumers and corporates alike will likely start to feel the strain, not only from higher base rates but also tighter banking lending conditions. As corporate and household debt refinancing becomes more expensive a slow-down in inflation is likely to be seen, but the pace of decline, and impact on the economy is yet to be seen. We remain cautious from a portfolio perspective, and believe that there is opportunity in fixed income driven by recent increases in government bond yields and widening credit spreads. As we near peak terminal rates, and see ever increasing catalysts for a recession, we believe that high quality short-dated investment grade bonds and longer dated sovereign bonds are sensible additions to portfolios.”
 
Lily Megson, Policy Director at My Pension Expert, said: “Another day, another blow to Britain’s savers. Even as interest rates continue to rise, any potential benefit savers might have experienced but a few years ago will likely be bulldozed by inflation – which has remained in double digits for almost a year.”

“Unsurprisingly, millions of Britons are worried. According to My Pension Expert’s own research from earlier this year, 44% of over-55s currently in work feel the cost-of-living crisis has rendered retirement impossible – a devastating figure, following their decades of hard work and diligent saving.

“In these challenging times, it is critical that Britons are empowered to secure their long-term financial aspirations. And this can only be achieved if they have access to the necessary support. The Government, regulators and the wider financial services sector must take steps to ensure education resources and independent financial advice are readily available. Access to such tools will ensure people can make well-informed financial choices and help them to achieve the retirement they want – and indeed deserve.”–Chieu Cao, CEO of Mintago, said: “Even if today’s interest rate decision does contribute to reducing inflation in the long-term, it’s unlikely that the financial stress that many Britons are grappling with will be going away any time soon. So, it’s more important than ever that people are equipped with the tools they need to navigate what continues to be an incredibly challenging economic climate.

“These tools must be provided by employers, many of whom are not doing enough to support their staff where financial wellbeing is concerned. Indeed, while the rising cost-of-living was the greatest source of stress for 62% of Britons, a staggering 64% of employers do not have initiatives in place that are designed to improve their staff’s financial wellbeing, according to Mintago’s research.

“Employers must take action and engage with their employees about the financial difficulties that they are facing. By providing more targeted financial wellbeing support – such as educational resources, access to financial advisers or an interactive pension contribution dashboard – that suits the unique needs of each employee, businesses can alleviate a great deal of the financial stress that people are facing, ensuring staff can stay on track for a secure financial future.”–Andy Mielczarek, Founder and CEO of SmartSave, a Chetwood Financial company, said: “Today’s quarter-point rise from the Bank of England is another reminder that inflation isn’t coming down fast enough, and households across the UK are feeling the effects. According to ONS data, the prices of food and non-alcoholic drinks are rising at the quickest rate in over 45 years – a factor which could lead to further hikes to the base rate this year.

“One upside for rapid interest rate rises is that consumers and investors should get more interest on their savings. But interest rates for easy-access accounts have often not kept pace with hikes to the base rate, which means that people could be losing out on potential gains on the money held in traditional accounts. For those in a position to put aside a lump sum and allow that pot to grow, it’s vital that savers explore how different savings instruments can support their financial goals. In many cases, fixed-term, fixed-rate bonds can offer much higher interest, while many savers will benefit from looking beyond traditional high street banks.”
 
Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “The BoE has been winding up interest rates since December 2021, approving 12 consecutive increases to the base rate which has upped borrowing costs and brought the golden era of low mortgage rates to an end – but there has also been a reprieve in savings rates.

“Not long ago, there was a belief among many economists that the interest rate hike cycle was coming to an end, but the persistence of double-digit inflation has flipped the script. Inflation is proving to be too hot and sticky, which means that interest rates may now peak at a level that exceeds initial forecasts.

“The double whammy of high inflation and high borrowing costs looks set to continue battering household budgets. As such, it remains important to keep a keen eye on your finances and understand how another hike in interest rates could affect you.”

Mortgage

“While its moves are influential, fixed mortgage rates don’t respond directly to the latest BoE interest rate decision. They will instead respond to the outlook for the economy and inflation – assessed through the movements in bonds yields. This is one of the main reasons why fixed mortgage deals have actually gone down since the autumn, when bond yield surged in the aftermath of the ill-fated mini-Budget, while interest rates have moved in the opposite direction. But uncertainty prevails, and the 1.4 million households* in the UK coming off ultra-low cost fixed rate deals in 2023 have some acclimatising to do.

“Variable rate mortgages aren’t affected in the same manner – they are tied to the movement in the base rate. As such, the approximately two million borrowers on variable rates could see their monthly mortgage payments increase – at a time when many can least afford it.

“Those approaching the end of their mortgage deals could benefit from being proactive in seeking the best deals now to have more options on the table further down the line. All mortgage offers are valid for a fixed amount of time. Typically, they will last between 3 and 6 months, depending on the lender. You are not tied to mortgage contracts until you sign on the dotted lines, so you can ditch it if you find a better deal in the interim.”

Savings

“Cash savings are back, after years in the doldrums in the fallout of the financial crisis 15 years ago. Another uptick in the base rate could push savings rates even higher – but there are no guarantees. The acceleration in the frequency of rate rises has meant that some savings providers may still be catching up to past base rate rises. It could take months for the increase in interest rates to trickle through to savers – if at all.

“But the uptick in savings rates has been devastated by inflation which has surged much higher, meaning you’ll be able to buy less with your money. In fact, the real value of cash savings has been eroded at an alarming rate in recent history.

“Those who can afford to put money away for five years or more should consider investing for the potential of long-term inflation-beating returns that far outstrip savings rates. Investing can be volatile on a day-to-day basis and while the potential for greater returns from the stock market comes with inevitable risk, taking a long-term view means you can smooth out some of those highs and lows while benefiting from the long-term potential that comes with this approach. You can invest from £25 per month, and some platforms, such as interactive investor, offer a free regular investing service.”

Borrowing

“When it comes to borrowing, common debt arrangements such as a personal loan or car financing won’t usually be affected by changes to interest rates because a fixed rate of interest is typically agreed before the loan is taken out. However, the rate of interest applied to credit cards and overdrafts could go down – even though they are not directly linked to the BoE base rate.”

 



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