The Bank of England has raised interest rates to 1.25 per cent, making it the highest it’s ever been in 13 years.
Interest rates were last raised to 1 per cent in early May, following a 0.5 per cent hike in February and a 7 per cent spike in inflation in March.
The rate hike today was at the lower end of consensus predictions, which had been split between 0.25 per cent and 0.50 per cent. The Bank of England still has a lot of work to do to control inflation according to experts, which is expected to peak at roughly 11 per cent later this year.
Royal London consumer finance specialist Sarah Pennells says: “Interest rates have climbed above 1 per cent for the first time in more than 13 years. While rising interest rates are generally a win for savers, our research shows that almost a third of people were planning to reduce the amount they were saving, while a fifth would stop altogether, as a result of the cost-of-living crisis. For those who can save, the gap between interest rates and inflation, now at 9 per cent, means savers are continuing to lose value on cash they have in the bank.
“Mortgage borrowers on a variable or tracker rate will be hit the hardest as their monthly costs will rise, and this could be a significant 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.
“Following a rise in base rates, 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. Even though re-mortgage deals are not as competitive as they were a few months ago, there are still discount or tracker rates on offer at less than 2 per can and fixed rate deals charging less than 3 per cent. A mortgage broker would be able to recommend the best mortgage for you as it’s not necessarily going to be the one with the cheapest headline rate of interest.”
Hymans Robertson co-head of DB investment Ross Fleming says: “For defined benefit (DB) pension schemes the impact of any short term interest rate is unlikely to change funding ratios. However, the rise in gilt yields which are happening, will have an impact on Scheme funding. For those DB schemes that are not fully hedged against interest rate movements, this further rises in gilt yields could provide more welcome tailwinds for funding and present an opportunity to reduce risk and lock in funding gains. This increase could also have an impact on Schemes’ collateral positions, backing any interest rate protection currently in place.
“We would therefore urge DB pensions scheme trustees to consider whether this interest rate movement is an opportunity to both take further steps towards shoring up the funding position as well as checking the impact on their Scheme liquidity.”
Broadstone head of investment consulting Marc Devereux says: “This latest Bank of England interest rate rise was widely anticipated by most observers and the market has priced in a path of further such rises to come. However, in combination with the 0.75 per can rise announced by the Fed this week, we have seen gilt yields continue to rise further with yields now over 1.5 per cent p.a. higher than the beginning of this year. The impact of substantially higher yields will mean a material reduction in the value of most defined benefit schemes’ liabilities.
“However, the overall impact on funding positions and investment arrangements could be very different depending on a scheme’s particular investment exposures and levels of liability hedging in place. For example, some schemes with limited amounts of liability hedging may have seen a significant improvement to their funding position, whilst well hedged schemes may have seen modest changes depending on how their other assets have performed.
“This is a potentially complicated time for schemes to navigate and current priorities may include collateral top-ups for liability hedging portfolios, asset rebalancing and decisions to de-risk or re-risk depending on specific circumstances. These can involve complex strategic decisions that require trustees and sponsors to discuss the situation with their advisers.”