- Bank of England raises rates from 4.5% to 5%
- The rise marks the 13th rate increase – unlucky for mortgage holders
- Savers currently enjoying higher rates could face unexpected tax hit
Laura Suter, head of personal finance at AJ Bell, comments on the latest Bank of England interest rate decision:
“The UK economy is verging on a doom spiral and this latest super-sized interest rate hike is only adding to it. The shock inflation figures this week have spurred the Bank’s ratesetters into action as they hiked rates from 4.5% to 5%. What’s more surprising is that not a single member of the MPC wanted to raise rates by just 25 basis points: seven of the committee voted in favour of the 50 basis points hike, while the remaining two continued to maintain that holding rates was the best course of action.
“This week has been dominated by uncomfortable commentary from all sides that the Bank of England has made a hash of trying to squash inflation, having moved too slow and too late. And while the brains of Threadneedle Street will try not to pay too much attention to market commentary, it will have added to the pressure to make a dramatic move now. That’s not to mention the government breathing down Andrew Bailey’s neck as it looks increasingly doubtful that Rishi Sunak will hit his self-imposed target of halving inflation by the end of the year.
“The fact that the Bank of England’s only tool to try to battle persistent and sticky inflation is further interest rate rises is looking increasingly flimsy in light of that stubborn inflation figure. But the Bank is still clinging on to its prediction that inflation will fall ‘considerably’ by the end of the year.
“Going into this rate rise markets were 60:40 split in favour of a rise to 4.75% vs an increase to 5%. The immediate market reaction after today’s rate increase showed a shift to more expecting rates to peak at 6% and for that peak to come in November rather than December or early next year. So higher rates and a faster move to that peak. This is not the news the nation’s mortgage holders wanted.
“The ratesetters acknowledge that the tendency for UK homeowners to be on fixed rate deals mean that so far many people have been protected from the impact of rising interest rates, which is acting as a drag on the effectiveness of these continual rate hikes. And the logic of the two MPC members who wanted to hold rates at 4.5% is worth noting: they think that the energy market falls and impact of interest rate hikes will filter through the system in time, without further rate hikes, and that there is a real risk the Bank overshoots its target by continuing to hike rates.”
Mortgage
“The plight of those 800,000 homeowners coming to re-mortgage before the end of the year has been well publicised, but there’s no avoiding the fact that the mortgage market is a horror show for anyone whose fixed rate deal ends in the next few weeks. Many who fixed two years ago are facing the prospect of a tripling of their mortgage interest, which will add hundreds of pounds to the average monthly mortgage bill.
“The worst thing a homeowner can do right now is bury their head in the sand and just let their fixed-rate deal end. The Standard Variable Rates that mortgage lenders charge those who have come off their fixed deal are truly eye-watering now, standing at 7.5% on average* – even one month of mortgage payments at that rate could be crippling to someone’s finances.
“Another group being clobbered are the big spike in people who decided to park their mortgage in a variable rate or tracker deal following the mini-Budget fallout last year, rather than fix at high rates. However, many who haven’t fixed yet will now be wondering when to jump into the fixed rate market, as rates have risen again and they are no better off than last December.
“It will be interesting to see how productive the government’s talks with mortgage providers will be in the coming days, as it has ruled out state-funded help for mortgage customers. Banks are already being urged to be lenient with borrowers and pro-active in offering support to those who can’t afford their bills. There are a range of options for those who can’t pay their mortgage, from taking a payment holding to shifting to interest-only or extending their term. But the current patchy help from lenders will be looked on very dimly by the government and opposition parties.”
Savings
“Savers are clearly enjoying the fact that banks have upped their rates and the top easy-access accounts have risen from 1.55% a year ago to just over 4% today*. However, the government is the biggest winner of this rise in savings rates, as it’s raking in far more tax than it expected. Last tax year it took in £3.4 billion in tax on savings – almost £2 billion more than the previous year. Savers who are benefitting from this rise in savings rates need to seriously consider whether a shift into an ISA is a good option, in order to protect their money from the taxman.
“But there is a sting in the tail here: ISA cash rates are often lower than non-ISA accounts. The gap has historically been higher but it has narrowed in the recent savings war. For example, the current top rate non-ISA easy-access account pays 4.01% but the top ISA version pays just 3.78%. Savers will need to do their sums to work out whether it’s worth picking a higher paying non-ISA account and paying tax on their savings interest, or putting it in an ISA and accepting a lower rate. It will depend on the size of their savings but also their income tax band, and so how much tax they are paying on their savings.”
*Based on Moneyfacts data.
