This week the Bank of England raised interest rates to their highest level since 2009. Here, we look at what the move means for your finances.
This week the Bank of England raised interest rates to their highest level since 2009. The base of interest was raised by 0.25 percentage points to 0.75 per cent.
Here, we look at what the move means for your finances.
Savers could be forgiven for thinking that an interest rate hike might mean a few extra pounds in their pocket.
But, frankly, a base rate rise probably won’t mean very much for your savings at all. Analysis has shown that in the seven months since the Bank raised rates to 0.5 per cent by 0.25 percentage points to 0.5 per cent in November, interest rates on current accounts have only increased by 0.09 per cent. Around half of savings account did not move at all.
Some banks and building societies are vowing to pass on the full rate rise to customers. Skipton, for example, says it will increase the rate on its Cash Lifetime Isa to 1 per cent plus a 0.25 per cent bonus. It says none of its variable savings accounts will pay interest of less than 0.6 per cent.
But even if the base rate is passed on, it’s not going to make a huge difference to the interest you receive. Wealth manager Quilter gives the example of someone with £2,500 in a typical savings account paying 0.42 per cent, who would only earn an extra £16 a year in interest with the rate rise factored in.
Those willing to tie their money up for longer may fare a little better. Fixed rate bonds improved their rates after the last rate hike in November, with the typical two-year bond rate rising from 1.43 per cent at that time to 1.58 per cent now. The average five-year fixed rate has increased 0.16 per cent to 2.15 per cent.
The average easy access account paid 1.19 per cent in February 2009, the last time base rate was higher than 0.5 per cent; today the same accounts typically pay a paltry 0.53 per cent, according to Moneyfacts.
Charlotte Nelson, finance expert at Moneyfacts, says: ‘Savers shouldn’t be fooled into thinking they’ll see much of a difference. On a balance of £1,000, a 0.25 per cent rise equates to an extra 21p a month in interest. And it could be months before savers see the new rate being passed on.’
A generation of homeowners have never seen interest rates go up, so they could feel the pinch if their monthly repayments rise.
Sam Mitchell, chief executive at online estate agent Housesimple.com, says: ‘Although this rate rise is unlikely to cause widespread panic, there will be lots of homeowners feeling a little less financially comfortable today. A generation of homeowners have never experienced a rate rise and now they have had two in the space of a year.’
Around 3.5 million residential mortgages are on a variable or tracker rate, which means they rise and fall in tandem with the Bank of England base rate. Homeowners on their mortgage provider’s standard variable rate – which is usually significantly higher than the best fixed rate deals – are paying an average 4.72 per cent.
At that rate, on a £150,000 mortgage, the interest rate rise would add around £18 a month or £224 a year to repayments. It might not sound much, but it amounts to an extra £5,600 over a 25-year mortgage term.
Some lenders have even pre-emptively raised rates, with 28 providers increasing rates in July alone – some more than twice. The average two-year fixed mortgage rate has increased from 2.33 per cent in November to 2.53 per cent today.
While this upward trend is likely to continue, it’s important to remember that mortgage rates are still incredibly low relative to history. The average two-year fixed rate in February 2009, for example, was 4.72 per cent.
Homeowners who shop around can still get very good deals. The average five-year fixed rate, for example, is 2.93 per cent.
Kevin Roberts, director at Legal & General Mortgage Club, says: ‘For any borrowers concerned about how this will affect their monthly repayments, now is the time to seek advice about fixing their rates for the future.’
The interest rate hike was widely expected by the markets – it had been given a 90 per cent probability of happening – and that means the stock market wasn’t shocked into a dramatic movement, which might have happened if it was caught off guard.
After the announcement the FTSE 100 was trading 98 points, or 1.3 per cent, down from the day’s starting point.
But there are areas of the market which may benefit from rising rates. Ben Yearsley, director at Shore Financial Planning, says banks and insurance companies may come into favour with investors as they tend to see their profits rise as interest rates increase.
As banks have recovered since the financial crisis they are also starting to pay dividends again, making them an attractive income proposition.
Yearsley says: ‘Investors could either buy shares in the businesses directly or consider a UK fund with a large weighting to financials.’
Mark Taylor, chief customer officer at Selftrade, says: ‘With such a gradual increase, I don’t expect too much disruption – yet. This increase was long expected and so has been priced into markets.’
He adds: ‘This is certainly a good time for investors to review their portfolio and go back to basics. Make sure you are diversified and think about drip-feeding cash into investments to mitigate any potential bumps in the road.’
The pound initially didn’t move much after the Bank of England’s announcement, but soon edged down against the dollar. Commentators say the fact that the Monetary Policy Committee voted unanimously in favour of rates surprised the market, which may have caused the dip – most people had expected a couple of votes against the rise.
A weaker pound is certainly good news for the FTSE 100 index, which has already been boosted in recent months as sterling has lagged the dollar. Some three-quarters of earnings on the index come from overseas, meaning that if sterling has fallen relative to the currency in which they were earned, their profits get a boost when they’re converted back into pounds.
But the FX movement is unlikely to welcomed by holidaymakers heading abroad for the summer. Those heading to the US and Europe will likely be getting less bang for their buck in the coming weeks.
A pound today buys just $1.30 or €1.12.
More rate hikes
Most experts seem to think this rate rise will be a one-off rather than the start of a string of hikes as we’ve seen in the US. Mark Carney said future increases would be at a gradual pace and to a limited extent.
Analysts at stockbroker Berenberg think the Bank will likely wait until after Brexit in March before raising rates again. It expects two rate hikes in 2019, the first potentially in May, with interest rates potentially reaching 1.75 per cent by the end of 2020.
Karl Steiner, economist at corporate bank SEB, thinks it will be a year until the next rate hike, however. He thinks weak economic growth, easing inflation and Brexit means rates are likely to stay at this level until August 2019.