Commenting on the Bank of England’s (BoE) recent decision to increase its base rate by 0.25%, rising to 0.75%, TMA director David Copland said that the decision was “no surprise” and will provide the bank with “wriggle room” to reduce rates again, if needed, as we approach Brexit.
“Prospects of a rate rise for the second half of 2018 have been looming for a while and this increased hugely last month with more members of the MPC calling for a rate rise than ever before,” Copland added.
Zurich head of retail platform strategy Alistair Wilson, stated that: “Continued low interest rates have left savers struggling to secure a return on their cash, while inflation eats away at the other side.”
Wilson further mentioned that rates are “finally heading in the right direction” for retirees relying on interest to supplement their income, but noted that they still need to rise further to make a “significant difference”.
This view is echoed by The Share Centre chief executive Richard Stone, who said that the base rate increase will be “welcome news” for those with cash savings.
“Although the increase may appear modest at just 0.25%, in reality, if you have a bank account paying interest at the base rate then the amount of interest income you will earn will increase by 50% as rates rise from 0.5% to 0.75%.”
However, Stone added that the “challenge” is whether banks will pass on the rate increase in full to savers, as many rates remained unchanged when base rate was last increased in November 2017, with this latest increase arriving just a week after the Financial Conduct Authority (FCA) published a discussion paper on savings rates, where it proposed the introduction of a Basic Savings Rate.
“It (the discussion paper) went on to suggest that it would consider the introduction of a Basic Savings Rate for older accounts to help ensure a better return for savers. In light of that it will be worth watching the extent to which banks feel the need to visibly pass on the higher base rate to savers this time around,” Stone said.
stepstoinvesting.com head Simon Longfellow made a similar comment, noting that it “could be months” before savers see the new rate being passed on.
“As such, savers need to be aware of other options to make the most of their money. A combination of low rates and high inflation meant UK savers saw the buying power of their money fall by £30.3bn in 2017 alone. An alternative to holding it in savings is to invest it, but there needs to be more education around the benefits and risks involved in investing as naturally people are fearful of what they don’t understand. At the moment many don’t feel confident enough to put their money in potentially higher yielding alternatives.”
Commenting on how the increase will affect borrowers, Stone added: “For borrowers, the impact of the rate increase may be felt more quickly although many are now on fixed rates – with a significant proportion of new mortgage deals in recent times being taken out on a fixed rate basis.”
Despite more borrowers taking out fixed-rate loans, Trussle CEO and founder Ishaan Malhi highlighted that there are more than three million people in the UK on variable mortgage rates, who could see an “immediate” financial impact from the rise. Malhi recommended that these borrowers consider switching to another deal.
“The rising interest rates mean the average homeowner on a variable rate with £200,000 left to pay on their mortgage will see repayments increase by £300 over the course of the year. As interest rates go up, it's more important than ever to stay in control by ensuring you're on the best possible mortgage deal and that you're switching to a more suitable deal when able to do so,” Malhi concluded.
Following a twitter poll conducted by MoneyAge, unsurprisingly, 81% of respondents felt as though the BoE made the correct decision in rising its base rate.
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