The Bank of England has raised interest rates to 4.25 per cent making the rise the 11th consecutive hike since December 2021.
Standard Life managing director for customer Dean Butler says: “Today’s 0.25 per cent rise in the Bank of England base interest rate, while potentially good news for people whose savings outweigh their borrowing, adds further pressure to the significant minority of retirees who still have a mortgage to pay.
“Only a year ago we were in a completely different environment – it’s difficult to believe that the rate was still below 1 per cent until last May. The speed and severity of the change has taken everyone by surprise, and retirees who were living quite comfortably in the spring of 2022 might now find themselves struggling, particularly as rate rises have been coupled with double-digit inflation.
“Most estimates of the savings you need to live comfortably in retirement, including the Pensions and Lifetime Savings Association (PLSA’s) Retirement Living Standards, assume no housing costs – however, this is not the case for all. Recent Phoenix Insights research found 13 per cent of retirees contacted were not homeowners, and so would find themselves paying a mortgage or on the receiving end of a rent increase as a result of higher rates.
“Retirees struggling to pay for their increased housing costs might naturally be tempted to dip further into their pension savings. While in many cases this will be a sensible decision, there’s always the risk of running out pension savings later in life.
“We would urge people to first look at ways in which they can review their budgets and it’s also worth checking entitlement to state benefits – a good first port of call for this is to visit the benefits calculators page on the government website GOV.UK. Many benefits are hugely unclaimed, including Pensions Credit.”
Hymans Robertson head of capital markets Chris Arcari says: “Yesterday’s upside inflation surprise, alongside an economy that has shown surprising resilience recently, will have emboldened the Bank of England to raise rates 0.25 per cent p.a. today, to 4.25 per cent p.a. February’s inflation figures revealed headline inflation rose to 10.4 per cent year-on-year while core inflation, which excludes volatile energy and food prices, rose to 6.2 per cent year-on-year.
“Market expectations of interest rates have fallen sharply recently on the back of concerns around the banking sector on both sides of the Atlantic, but markets were still pricing a more than even chance of a 0.25 per cent p.a. rise.
“While most forecasts expect inflation to decline reasonably sharply this year, notwithstanding yesterday’s upside surprise and the likely tightening in bank credit standards following weakness in the sector, may mean central bank’s will have less of the leg work to do, there are still ample reasons for the BoE to have raised rates.
“A tight labour market, which is seeing year-on-year wage growth of 6.5 per cent year-on-year, is maintaining pressure on core services inflation, which in turn is keeping central bankers nervous of the possibility a self-fulfilling wage-price spiral takes hold. Furthermore, central banks have sufficient tools to provide liquidity to the financial system to ensure financial stability, whilst still raising interest rates to reign in excess demand.”
AJ Bell head of personal finance Laura Suter says: “This has to be the first interest rate hike that can be linked to a salad shortage. Before yesterday’s inflation figures release it was 50:50 whether the Bank was going to hike rates or keep them at 4 per cent but once that leap in inflation was published it looked nailed-on that another interest rate hike was coming our way. Just two members of the Monetary Policy Committee voted against the increase, instead thinking rates should stay at 4 per cent.
“The increase to 4.25 per cent marks another 14 year high – the last time rates were higher was October 2008. It also marks the 11th consecutive interest rate hike since the current rate hike cycle began in December 2021.
“The bank has two competing devils on its shoulders that it wants to respond to: the ongoing crisis in the banking industry putting the jitters in markets and the worry that inflation isn’t dropping back as fast as it had hoped. Today inflation won.”
“The MPC has highlighted banks’ failure to pass on rates rises in its latest report. It points out that easy-access savings rates have risen by ‘significantly less’ than in previous rate-rise cycles, which has pushed more savers into fixed-term accounts in search of higher rates.
“The fire in the savings rates war has died out a little in the past couple of months, but another boost to interest rates should help to rekindle it. A bigger factor is the government’s move in last week’s Budget to task NS&I with raising even more money from savers this year. The mandate means the government-backed provider will have to increase rates and boost its Premium Bond prize fund in order to draw in more savers – a task it’s already struggling to do. This in turn will prompt other providers to up their ante to keep savers’ money.
“Now interest rates have reached meaningful levels savers are being far savvier – they are more likely to move their money to benefit from higher rates, rather than sit by and leave their money earning very little. But anyone who hasn’t shifted their money to a best buy account will be getting little or no benefit from the rate hikes.
“Banks have been hauled before the Treasury Select Committee and criticised for not passing on rate rises quickly enough, but until that changes savers need to ditch their account and switch to a top-rate offering. Clearly savings rates are still a million miles from inflation of more than 10 per cent, but savers need to get the best return they can, even if it can’t combat rising prices.”
LV= chief investment officer Adam Ruddle says: “The Bank of England’s decision to raise interest rates by 0.25 percentage points is in line with our expectations. The Bank is in a difficult predicament. On the one hand, inflation in February unexpectedly increased leaving the UK inflation higher than the US and Eurozone.
“On the other hand, there are some signs that previous increases are weakening the housing sector and hurting the economy; added to that, the recent banking turmoil is in itself a disinflationary pressure. We believe the Bank has sought to balance these considerations whilst remaining clear that managing inflation down is its key responsibility – even if that means subdued economic growth.
“While an increased rate helps tackle inflation it hinders economic growth, increases mortgage payments and squeezes living standards. This week’s figures showing a rise in inflation shows that rising prices remains a stubborn, and potentially domestic, problem. I believe the Bank may continue to raise interest rates to 4.5% over the coming months.”