- A rise to 4.5% is the twelfth consecutive rate hike
- The increase to 4.5% marks another 14-year high – the last time rates were higher was September 2008
- 1.4 million people on a tracker or variable rate mortgage will see an increase in their costs
- Path to peak interest rates remains unclear
Laura Suter, head of personal finance at AJ Bell, comments on the latest Bank of England rate hike:
“Ahead of this rate increase markets were pricing in a 99% chance of a hike – but we’ve all learnt with bitter experience not to rely too heavily on interest rate forecasts in the past year. The decision to increase rates to 4.5%, notching them up another 25 basis points, marks the twelfth consecutive increase from the Bank of England and takes us to another 14-year high – the last time rates were higher was September 2008. Once again two members of the MPC deviated from the consensus, instead preferring to maintain rates at 4.25% for another month – and thereby end the rate hiking streak.
“Among the MPC’s projections are that inflation falls more slowly than they were predicting in February, with stubbornly high food inflation acting as a barrier preventing headline inflation from coming down. But even the Bank’s rate setters can’t see a clear outlook for inflation, saying there are ‘considerable uncertainties’ over the path back to 2%.
“Another rate hike is not what the British public want. We’re a nation who has dipped into, or entirely pillaged, our savings to cover the cost-of-living crisis, meaning many people are less able to benefit from rising savings rates. And on the flip side, many people are either facing re-mortgaging or are trying to get onto the property ladder, meaning another hike in borrowing rates is the last thing they need. On the plus side, much of today’s rate hike has already been priced in mortgage rates, meaning no dramatic uptick in rates is expected.
“What’s frustrating for Brits is that there’s no clear route out of this rate hiking cycle and the outlook for rates is changing so quickly it’s hard to keep track of. Currently we’re expecting another one, or possibly two, interest rate hikes after today, with rates peaking near 5%. The broad consensus is that rates will then start to be cut around January next year, but there is a big spread of views on whether that will happen sooner, or whether we may need to wait until further into 2024. Again, the problem of sticky inflation that won’t fall as fast as the Bank of England wants has a lot to answer for.”
Savings
“Savings rates are still a million miles from inflation of more than 10%, but savers need to get the best return they can, even if it can’t combat rising prices. However, many banks are stubbornly failing to hike their interest rates and savers need to shift their money to benefit from better rates. The MPC highlights that while the Base Rate has risen by 4.4 percentage points, instant access savings rates have risen by just 1.4 percentage points during that same period.
“The good news is that we’re now seeing more of that, with savers shifting their money from instant-access accounts paying little interest into fixed-rate accounts paying far more. People are also moving money into NS&I, after the government-backed provider upped its rates on a number of its most popular accounts. In March alone savers paid £3.5 billion into NS&I and a further £7 billion was paid into fixed-rate and notice accounts, while instant access accounts saw outflows. All this movement will worry banks who will be losing some business, which might spur them on to raise rates.
“As a rule of thumb if your savings are sitting in your current account or if you’ve had your savings account for a year or more, you’re almost guaranteed to be able to get a better rate somewhere else. It only takes a few minutes to shop around for a better deal, by going to a comparison website and working out the best option for you. Now accounts can be opened online or via an app, it might only take five or ten minutes to open a new account, so minimal hassle for potentially high rewards. For example, someone with £10,000 in a savings account earning just 1% who shifts to the top paying easy-access account, which currently pays 3.7%, would make £271 a year in extra interest – worth ten minutes’ work.”
Mortgages
“The 1.4 million people on a tracker or variable rate mortgage will see an increase in their costs as a result of today’s hike. For someone with £250,000 of mortgage borrowing, a 0.25 percentage point rise means an extra £35 a month in costs, while at £400,000 of mortgage borrowing a 0.25 percentage point rise means an extra £56 a month or more than £672 a year.
“One group that will be particularly dismayed are those who opted for tracker mortgages last year amid the sharp rise in mortgage rates following the mini-Budget. Many had expected rates to stop rising by now, meaning they will be hit with an unexpected increase in costs. Mortgage brokers are now urging people to fix, rather than wait on the sidelines on a tracker – with a risk that rates might rise further from here, and no sign in sight of an imminent fall in rates, there may be little benefit in opting for a tracker.
“On top of that 1.3 million households are expected to re-mortgage before the end of the year, according to the Bank of England, at an average extra cost of £200 a month. Those who are going to get really clobbered are the people coming off a fixed-rate deal who haven’t got a new mortgage sorted and who end up falling on their lender’s standard variable rate. Moneyfacts data shows the average SVR has leapt over 7% now and means that someone coming off the average two-year fix from 2021 will see their rate rise from 2.58% to 7.3%. On £400,000 of borrowing that would represent a truly shocking increase of £13,128 a year in mortgage costs – almost £1,100 a month. Even at £250,000 of borrowing it means a rise in costs of £683 a month – or almost £8,200 a year*.”
*Based on a 25-year repayment mortgage
