Bank of England announces base rate hike to 1%: experts comment

by | May 5, 2022

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Bank of England announces fourth consecutive rate hike as bank base rate hits 1% whilst the Bank says it expects inflation to hit 10% this year.  Three members of the MPC voted for an even bigger hike of 0.5% which sets the tone for what we can expect in the months to come. 

The announcement was made today at midday, when the Bank of England released it’s latest quarterly Monetary Policy Report which sets out the economic analysis and inflation projections that the MPC uses to make its interest rate decisions.

Whilst this latest hike hasn’t come as a surprise to the market given spiralling inflation, what have investment experts made of today’s news? Check out the commentary below:

 

Jonny Black, strategic director at abrdn, Adviser, said: “This is the Bank’s fourth consecutive rate rise.

“For advisers, this could prompt fresh conversations with clients around how the highest base rate in 13 years and inflation will affect their finances, particularly in areas such as inflation-proofing their retirement income.

“This may be greater client interest in annuities, with their rates increasing in recent months as the Bank rate has crept up. More broadly, however, it will be another chance for advisers and clients to review investment and drawdown strategies to ensure that individuals – approaching retirement, and who have already retired – still have the best chance of making their money work for them, and to adjust if necessary.

“Whether this is the last rate hike this year remains to be seen. All eyes – including those at the Bank – will now be on the upcoming April inflation figures to see just how much more the cost of living could rise.”

Commenting on today’s announcement from the Bank of England, Sarah Pennells, Consumer Finance Specialist at Royal London says:

“Interest rates have increased for the fourth time in six months with the latest hike taking the base rate to its highest level since 2009, rising by a quarter-point from 0.75% to 1.00%.

“Interest rates rose in December for the first time since 2018 and the Bank of England hasn’t paused for breath since, with four successive rises signalling the end of a sustained period of ultra-low rates.

Savers

“Savers are being hit with a double whammy. Those who can leave their savings untouched will still lose money in real terms, despite today’s rate rise, because the return on cash held in savings is significantly below the current high level of inflation. The rise in the cost of living, outpacing the rise in wages, is also forcing others to dip into their savings, with a quarter (24%) of full time workers in the UK  looking to access some or all of their short term savings to help them get by day to day.

“A fall in disposable income also means we’re spending more and saving less. As costs continue to rise, it’s turning on its head the situation created during the pandemic where millions became ‘accidental savers’ to a situation where inflation is forcing us to become ‘accidental spenders’.

Borrowers

“Alongside interest rates, sharp rises in household bills and the general cost of living is a huge concern for 95% of adults in the UK, leaving many wondering how they’ll make ends meet. Worryingly, a fifth (21%) of people plan to borrow their way out of trouble, at a time when the cost of borrowing is escalating.

“Mortgage borrowers on a variable rate have barely had time to deal with the effects of the last rate rise and are now faced with a further increase. Every quarter per cent rise in mortgage rates costs someone with a £200,000 25-year repayment mortgage an extra £27 a month. While some homeowners will be able to afford that, others will undoubtedly struggle, especially as other costs spiral.”

*Royal London commissioned a survey by Opinium between 25 February and 1 March 2022 with a sample of 4,001 nationally representative UK adults.

Les Cameron, Financial Expert at M&G Wealth, said:Today’s rise was not unexpected and, with further rises predicted before the end of the year, the important question for many is whether it will translate to higher rates available to savers or to increased borrowing costs.

“With continued high levels of inflation, a modest increase to savings rates would still mean that most cash or near-cash savers, for example National Savings & Investments, would see their wealth being eroded in real terms.

“Many of those with cash savings are pensioners who spend a higher proportion of their savings on energy costs, which we know are increasing at a much higher rate than those in the headlines. The increasing cost of living, as evidenced by the 54% increase in average energy bills announced recently, will mean those repaying debt that is not on a fixed rate will no doubt feel the pinch even more if rates rise.

Martin Lawrence, Director of Investments at Wesleyan, the specialist financial services mutual, said: “Today’s decision by the MPC took the base rate to a 13-year high. While time will tell how much this helps to temper soaring inflation, what’s certain is it will have immediate effects on individuals’ finances – for some, compounding the pressures they’re already facing amid the rocketing cost of living.

“One group who might be negatively affected are those with a tracker or standard variable rate mortgage, which can change in line with fluctuations in the Bank of England’s base rate. Following today’s announcement, households already struggling to make ends meet could end up potentially paying hundreds of pounds more in annual repayments.

“On the other hand, interest rate rises can be good news for savers. However, any extra interest will still fall far short of current inflation rates, meaning hard-earned money held in simple savings accounts will continue to be at risk of losing value in ‘real terms’ – gradually buying less and less over time.

“For those who have savings – and particularly for the fifth (21%) of UK savers who have nearly all of their savings in a standard bank account – it is ever-more important to think about what they can do to help protect their money from inflation’s effects, including options like investing.”

Marc Reale, Wealth Manager at Wilton comments: 

“Rising interest rates have become a rare certainty in a sea of uncertainty. 2022 is shaping up to be a battle of nerves that will put many people’s financial judgement to the test. Do you lock down the cost of borrowing and utilities now, at prices which would have seemed expensive until recently, or bide your time in the hope that events will turn and run the risk of falling foul of future rate hikes?

“Economic optimism is far harder to come by than most people hoped for, even with the pandemic subsiding. Many households and business owners are in new and unchartered territory when it comes to managing their finances. But it’s important to look past the gloom and remember that borrowing costs remain low by any sensible definition of ‘historic standards’.

“The flipside of today’s rise is that investors will be seeking higher returns than they’ve been willing to settle for while interest rates flirted with zero. The landscape for investment and borrowing decisions is changing rapidly and financial planning can’t afford to be seen as a once-a-year exercise in the current climate.”

 

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