In today’s announcement from the Bank of England (BoE), the “old lady of Threadneedle Street” is certainly cracking the whip against the inflation battle as the Bank steps up its mission to bring inflation back to the 2% target by hiking base rates by 0.5% to the new level of 1.75%.
Clearly there are big implications of this for borrowers and businesses. Whether savers get to benefit – and when – from today’s hike is another question.
As UK inflation rose to a 40 year high in June, hitting 9.4%, with the inflation peak now expected by many experts to be seen in Spring 2023 rather than the autumn this year, the BoE is getting serious in its fight against the rising cost of living.
So what do investment, mortgage and property experts think of today’s BoE news?
Richard Ollive, Specialist Financial Adviser at Wesleyan, said: “Today’s decision by the Bank of England to hike interest rates by 50 basis points to 1.75% is its largest since 1995 and will have a profound impact, particularly on homeowners.
“Figures show that just over a fifth of all mortgage holders in the UK are on variable rate deals, meaning around 1.9 million homeowners will be hit with a rate rise, and potentially end up paying hundreds of pounds more in annual repayments.
“As a result, many of those will now be looking at their deals – possibly for the first time in a long time – and considering whether they would be better off remortgaging for a fixed deal instead.”
Steven Cameron, Pensions Director at Aegon, comments: “The Bank of England’s gloves are off as they hike the base rate by 50-basis-points to 1.75%, the biggest rise for 27 years, in its fight against inflation. Currently sitting at a 40-year high of 9.4%, it’s now expected to rise to 13% in Q4 2022.
“Today is the sixth round of consecutive rate rises and will compound the short term financial pain for those borrowing money and paying off debt during this cost-of-living crisis. Aegon’s latest research shows 1 in 5 adults (19%) have increased the amount of money they borrow since the cost of living crisis to cover rising bills, including over a third (36%) of under 35s*.
“But rising rates may offer a glimmer of good news to cash savers if the BoE’s hike filters through to interest rates paid on cash savings accounts. But even if earning 1.75% interest on savings, the current inflation rate of 9.4% still means losing over 7% in purchasing power each year.
“Rising interest rates tend to have different impacts by age group, with younger or working age individuals more likely to lose out because of greater debt, but older cohorts potentially gaining as more likely to have larger cash savings. But an extra 0.50% interest on £10,000 savings will provide just £50 a year, hardly making a dent in rocketing energy bills with the autumn energy price cap increase expected to increase average bills by almost £1400 a year**.
“With interest rate rises and inflation at their highest levels for decades, and with ongoing stock market volatility, the decisions facing savers, investors and borrowers are particularly complex and many would benefit from seeking advice.”
Paul Craig, portfolio manager at Quilter Investors comments: “The Bank of England has clearly decided that now is the right time to bring out more firepower and raise rates by 0.5% for the first time since 1995. It has clearly taken note of what the Federal Reserve is doing in the US and feels it could be running out of time to grapple inflation and get it under control.
“In the back of the mind of policy makers will be the current public mood. Sentiment is shifting against the Bank of England with a recent survey pointing to more people being dissatisfied with the job it is doing than satisfied people. Clearly inflation has been stickier than expected, but the BoE has been slow to act, preferring instead to raise rates incrementally. That time is now gone, especially with concerns inflation will peak at 12%.
“The other significant shift from the BoE in recent weeks was the dropping of mortgage affordability rules. With the economic picture looking incredibly challenging, and mortgage rates subsequently rising off the back of the BoE’s moves, the decision to drop those rules is looking more and more circumspect by the day. There is a concern the lessons of 2008 are beginning to be forgotten.
“The BoE will feel justified to be this aggressive given the strength of the jobs market, but the data is beginning to roll over. Jobs growth is weakening, PMIs are beginning to show businesses seeing slowdowns, while consumer savings are being depleted. This may be a silver lining for the BoE as with that inflation itself should begin to fall, but with the new energy price cap only a matter of months away, it won’t be long until rate cuts are back on the table to deal with sluggish and potentially negative economic growth.”
Jonny Black, strategic director, abrdn, said: “Such a significant hike in the base rate could mean even the most confident clients will have questions about what they should be doing in response.
“Advisers will need to be prepared to answer urgent concerns. But their value is going to go far beyond that from a client’s perspective.
“Intense media coverage of interest rates and rising inflation may be spurring some clients to react with a short-term view. Advisers can prevent panicked decision making – helping to ensure that clients are maintaining the right balance of short- and long-term investments for their specific needs, so that their financial goals and ambitions remain firmly on track.”
Adrian Anderson, Director at property finance specialists, Anderson Harris, comments: “We have a mortgage interest rate ticking time bomb scenario. Circa 74% of mortgages are fixed however it is likely these borrowers will be moving onto much higher rates at a time when many other outgoings have already increased. It is widely expected that over the short term mortgage fixed rates will continue to be re-priced upwards hence take action now.”
William Scoular, Head of Private Client Lending, Investec Real Estate comments: “With inflation running at historically high levels, this [interest rate] increase was widely expected. Whilst further dampening demand in certain parts of the property market, we expect the residential sector to remain robust, underpinned by the continued imbalance of demand outstripping supply.”
Finn Houlihan, Managing Director of Arlo Group and ATC Tax, said: “With today’s interest rate rise of 50 basis points, the Bank of England’s (BoE) strategy of smaller incremental rises has been parked in place of a more significant increase. With the cost of living rising by 9.4% across the year, the BoE has been given the undesirable task of battling inflation while trying not to impact the economy in a harmful way.
“However, while the cost-of-living crisis has been ongoing since the start of the year, many won’t begin to feel the real impact it poses until the next energy price cap – expected to rise by 70% – coming into force in October. Government support will definitely help in the short term, but the role of financial advice will become ever more important as a result.
“Financial advisers across the country need to provide consumers with strong tax led advice in order to help them negate the cost-of-living crisis. By reviewing income and expenditure, they can help mitigate the impact and help people to understand whether they have enough disposable income for the future.”
Kevin Brown, savings specialist at Scottish Friendly, comments: “Today’s base rate rise will squeeze household incomes even tighter by pushing borrowing costs to their highest level since 2009, and the worst is still to come.
“Markets expect rates to increase to more than three per cent by next year and this is on top of inflation soaring well into double digits in 2023, exceeding the Monetary Policy Committee’s previous forecasts.
“Homeowners on a fixed rate mortgage are unlikely to be affected by any change in the bank rate, but for those with variable deals today’s 0.5% hike is going to make a considerable difference.
“The average variable rate is 2.77% according to UK Finance, so on a £250,000 loan over 25 years a 0.5% increase would add approximately £65 a month or nearly £779 a year.
“Plus, with the energy price cap set to rise again by at least £800 in October, the pressure on households is going to ratchet up. The net result will be people saving less and borrowing more to make ends meet.
“There are already signs that households have become more dependent on credit as the cost-of-living crisis has intensified. The latest figures from the Bank of England show the annual growth in credit card borrowing hit 12.5% in June, the highest level since November 2005.
“Coping with rising living costs while also paying more to borrow money, is going to make life particularly hard for those on lower incomes. Anyone still able to save should be encouraged to do so as rates are likely to rise, but be aware that if the gap to inflation widens, returns in real terms will continue to fall.”
Sarah Pennells, consumer finance specialist at Royal London, comments: “Today’s half-point hike in interest rates from 1.25% to 1.75% will be dismal news for borrowers already digesting successive rises this year. While the Bank of England raises interest rates ever higher in an attempt to reduce inflation, which reached a 40-year high of 9.4% in June, people with variable rate mortgages face higher payments, weeks ahead of the energy price cap rise on October 1st.
“A half per cent rise in mortgage rates will cost someone with a £200,000 25-year repayment mortgage over £50 extra a month. And of course the rise of other costs mean people’s pockets will be being hit hard – but a year ago the base rate was just 0.1%, so borrowers with a £200,000 mortgage are now paying approximately £180 extra a month. That’s on top of higher food and fuel prices.
“Savers, on the other hand will be encouraged that savings rates, if passed on fully, will see rates come out of the doldrums. Banks and building societies don’t necessarily raise interest rates on all their savings products and may not increase them by the same amount, so it’s worth waiting a few weeks before checking comparison websites and best-buy tables to see if you can get a better interest rate.”
Fraser Harker, Investment Analyst, 7IM comments: “The Bank of England has today announced the largest increase in interest rates for 27 years – from 1.25% to 1.75%. This serves as a reminder that ‘BREAKING NEWS’ does not necessarily equate to surprising news. Given the scale of inflation that the UK is currently facing, such an increase was very much anticipated by the market. In fact, given the level of price rises we’ve seen, perhaps the biggest surprise is that the largest increase in almost three decades was supported by only eight of the nine members of the Bank’s Monetary Policy Committee.
“However, the minutes of the committee’s meeting also contained the dreaded ‘r-word’. The Bank of England predicts that the UK will enter a recession from the fourth quarter of 2022. Queue headlines that the UK economy will plunge/nosedive/plummet into recession before the end of the year.
“As ever, we think it’s important to look beyond the headlines. For a while, we’ve thought that rising rates across the world would slow economic activity and, by extension, inflation. Like many markets, we see the UK in a ‘sideways with volatility’ phase. Asset values have fallen, but any recovery can’t take place until investors are more certain about the future. This means things will remain jumpy, particularly until there is greater clarity regarding the energy crisis in Europe.
“It’s unsurprising that the word recession elicits an emotional response – the Global Financial Crisis left many scars. However, the word recession means different things to different people. It’s perfectly possible that by the end of the year, the UK will have exhibited two consecutive quarters of falling GDP. However, this doesn’t necessarily have to be accompanied by the things that most people associate with a recession – such as widespread rises in unemployment and significant drops in house prices.”
Jonathan Camfield, Partner at LCP, adds: “Whilst much of today’s interest rate hike was no doubt already priced into markets, what will be of more immediate interest to pension schemes is the further increase in inflation outturn that the Bank of England is now expecting – up to 13%. The longer high inflation continues, and the higher it gets, the more challenging it will be for pension schemes to navigate. There are significant implications for funding and investment strategies, strategic journey planning, and various aspects of member benefit calculations, all of which should continue to be actively monitored by trustees and employers, to ensure they don’t get wrong footed in this fast evolving situation.”