Interest rate rise: Experts respond

The Bank of England has announced that interest rates have been raised to 1.0%; we asked the experts what the decision means for pension savers, employees, financial markets and household finances.

We stared by asking James Andrews, senior personal finance editor at money.co.uk, who said:

 
“The Bank’s decision will prove to be either incredibly damaging or wonderfully foresighted depending on what happens over the next few months.

“One thing we can say for certain is that it will do almost nothing to bring down the cost of living for households across the UK – which is being driven by global energy prices and supply chain issues.

“Another thing we can say for certain is that it will make borrowing more expensive at a time when more and more people are being forced into debt to meet rising bills.

“We can also say with some certainty that it will put downward pressure on house prices – making mortgages more expensive at a time that rising essential bills make them less affordable too.

“So what’s the upside? If the Bank is proved right, then action now will stop wage rises turning this year’s high inflation into a permanent feature of the economy.

“But if they’re wrong, they’ll simply accelerate the UK’s path into recession and a possible house price crash, all the while making the current cost of living crisis even worse for people struggling with debts.”

Becky O’Connor, Head of Pensions and Savings, interactive investor, says: “The economy is tilting on its axis and a return to a higher interest rate environment means relearning old, forgotten rules for savers, borrowers, and investors.

“The last time rates were at 1%, the economy was responding to the financial crisis. Then, rates were heading down. Now we’re in a cost-of-living crisis and they are heading up.

“What will make the navigation of a rising rate environment even harder is that inflation, for now, remains high. It is yet to be seen whether higher rates will have the desired effect of bringing down inflation. Until it does, some people who are already struggling will feel like higher borrowing rates and rising living costs is a double whammy they just can’t cope with.

“Some young workers have lived a good chunk of their adult lives without ever experiencing a rising interest rate environment. They now face a steep, and possibly harsh, learning curve. The possibility of ongoing rate rises could be particularly hard for recent first-time buyers who have taken on big mortgages in the last few years and could see their affordability stretched further as they settle into their homes.

“It could take consumers some time to adjust their finances to this new reality of higher rates, particularly as they struggle with the rocketing cost of living.”

Credit card and personal loan borrowers

O’Connor continues: “The use of personal debt has been getting some people through hard times, and more are likely to have to resort to debt in the coming months to cover higher bills, but this could also become more costly if lenders further hike the rates on loans and credit cards in line with base rate rises.”

Mortgage borrowers

O’Connor explains: “Variable rate mortgage borrowers will want to quickly appraise whether they want to stay on their current deal or switch to a fixed, either now, if they can, or when they come to the end of their current mortgage deal.

“Borrowers with fixed-rate deals that end in the next 12 to 18 months may already be worrying about what will be available for them when the time comes to remortgage and what will happen to their monthly costs. Remember, you can lock in a rate up to six months before your current deal ends.”

Savers 

O’Connor says: “People with cash savings have been losing money in real terms for some time, in more than a decade of low interest rates.

“Some savings rates will now rise, but not all – and certainly not all in line with the base rate rise. For those wanting to keep money in cash, the good news is you might get at least some reward, the bad news is you will really have to hunt for the best rates around and accept that inflation will most likely still be eroding your returns for some time to come.

“If you don’t need the money for a few years, investing might offer higher returns. But there are caveats, as higher rates and high inflation are affecting investment returns in different ways, too.”

Investors 

O’Connor says: “People with stocks and shares ISAs and other investment accounts will have already noticed the shift in rates and inflation affecting their returns, though the impact is different for different asset classes and sectors.

“Getting the balance right between equities and other assets, including bonds and property, will be increasingly important for those looking for long term returns that outpace inflation.”

Retirees 

O’Connor explains: “Annuities were already starting to make a comeback, and the appeal of these guaranteed income for life products for pensioners may now get stronger still. Annuity rates had been in the doldrums. They are now rising. While many choosing how they want to take an income in retirement will continue to want the freedom and control that drawdown gives, plus the chance for your pension to remain invested in the stock market for growth, those who ultimately want a zero-hassle income they can depend on may start to consider the safety of annuities as a plus point again.

“That said, a good drawdown investment plan and income strategy could still generate a higher income, so it will still depend on personal preferences.

“Many retirees also have large cash savings balances, and often feel they have no choice but to keep a lot in cash. They will be looking forward to seeing higher returns here and keen to see the banks move to increase rates quickly.

“The cost of living has affected pensioners badly, and a rise in savings rates could help them disproportionately, too.”

Employees

 
Chieu Cao, CEO of Mintago said: “There are two sides to the coin when it comes to rising interest rates. Those with debt are likely to face higher repayment, but money in savings should see those pots grow slightly faster. Yet in reality, savers are unlikely to see any short-term benefit from this increase in interest rates. Soaring inflation, national insurance hikes and a freeze on income tax are all taking their toll, which will encroach on both their financial and mental wellbeing. For instance, recent research from Mintago found that for almost a quarter (23%) of full-time workers in the UK, concerns about their financial situation are negatively impacting their job performance.

“Under such circumstances, it is vital that businesses take a more active role in helping their employees to regain control of their financial situation – both immediate and long-term. This might involve several actions, like engaging people in open and honest conversations about their finances, to adopting platforms to help employees engage with several aspects of their personal finances; from pension schemes to credit card management.

“There will be no quick fix to this cost-of-living crisis, as experts expect economic volatility to continue throughout the coming 12 months. However, we mustn’t underestimate the positive impact of employer support, be it large or small. Through this support, employers can play an invaluable role in helping employees regain control of their finances and improve their overall wellbeing. By contrast, the worst thing an employer could do is to ignore the issue or dismiss it as being outside of their remit.”
 

Pension Savers

 
Andrew Megson, executive chairman of My Pension Expert said: “With inflation expected to rise beyond its thirty-year high of 7%, this further increase to interest rates is no surprise. But let’s face reality: in the current climate of low interest rates and high inflation, money in savings is likely to be losing value in real terms.

“Savers, particularly those who have amassed a healthy pension pot, will naturally be wondering what this means for their financial futures. Indeed, the danger with is that high inflation could drive some people to make drastic changes to their pension or saving plans as they look to make their money work as hard as possible. In fact, My Pension Expert’s recent research found that in the past year, a third (33%) of over-40s in the UK have placed more of their savings into investments to counteract the current economic situation. Turning to different investments to achieve greater returns and bolster one’s retirement strategy could make sense, but making such reactive decisions regarding one’s finances could also cause irreversible damage later down the line.

“It is vital, therefore, that pension planners remain calm and consult an independent financial adviser before making any major decisions. Advisers will take the entirety of an individual’s situation into account and make tailored recommendations to suit their specific needs. In doing so, savers can be more confident that their financial strategy keeps them on track to a financially secure retirement.”
 

Household Finances

 
Richard Eagling, senior personal finance expert at NerdWallet said: “While the BoE attempts to curb inflationary pressures with this hike in interest rates, there is unlikely to be much relief for households. Rumours of recession, teamed with fears that inflation and energy bills are likely to soar further within the next year, are putting many people’s finances under strain. Indeed, almost a quarter (23%) of UK adults say they are finding it more difficult to keep up with monthly bills compared to a year ago.

“In the face of such a challenging economic landscape, it is vital that individuals are proactive in understanding their financial situation. Keeping track of all incomings and outgoings will be critical in helping them to identify any potential issues or pinpoint areas where savings can be made. Crucially, if they find themselves struggling to keep up with monthly bills or debt repayments, they should speak to their provider as soon as possible to establish their options. For example, some mortgage lenders allow borrowers to temporarily commit to interest-only repayments while their financial position stabilises. However, borrowers should always read the small print before committing to such options, as this could prove more costly in the long-term.

“Importantly, if households feel like they are drowning under financial pressures, help is on hand from charities such as StepChange or Citizens Advice. The key is to remain calm and consider all the options available. There are seldom any quick fixes, but if individuals take a proactive approach they may be able to regain control of their financial situation and make more informed decisions in the challenging months to come.”
 

Financial Markets

 
Giles Coghlan, chief analyst at HYCM said: “With inflation sitting at a 30-year high of 7%, today’s dovish hike from the Bank of England (BoE) is a sign that policymakers are now entering increasingly choppy waters when it comes to controlling the inflation narrative. Generally speaking, the BoE does not want to see inflation entering strongly into wages. Once it does, the issue becomes systemic and generates a force of its own, which becomes exceedingly difficult to control. The so-called ‘wage-price spiral’.

“At the same time, today’s increase is not without risk: higher rates will inevitably place pressures on growth, as well as increasing cost burdens on U.K. households – the latter being an issue that many consumers are already having to grapple with. Given that energy prices are continuing to rise against a backdrop of continued geopolitical unrest, this fourth consecutive rate increase from the BoE presents the unique difficulties at hand for the Monetary Policy Committee.

“The task of reining in inflation without stomping out growth is a careful balancing act, and one that is already tipped in the favour of negative economic growth. Going forward, central bank-watchers can expect unemployment to rise gradually, as well as further modest hikes from the BoE, who are likely to accept the risks either way. This should keep EUR/GBP supported, with the European Central Bank looking increasingly likely to hike rates in July, and buyers on dips lower.”