The Bank of England has raised interest rates to 0.5 per cent making it the highest it’s ever been in over 30 years. This comes after an inflation increase of 5.4 per cent in December.
M&G Wealth financial expert Les Cameron says: “What remains to be seen is whether this rise will translate to higher rates available to savers or to increased borrowing costs.
“With the current high levels of inflation we’re experiencing, a modest increase to savings rates would still mean that most cash or near-cash savers, for example, National Savings & Investments, would see their wealth being eroded in real terms. Of course, many of those with cash savings are pensioners who spend a higher proportion of their savings on energy costs, which we know are increasing at a much higher rate even than the headline inflation rates. The increasing cost of living, as evidenced by the 54 per cent increase in average energy bills announced today, will mean those repaying debt that is not on a fixed rate will no doubt feel the pinch even more if rates rise.
“With higher inflation and potentially higher borrowing costs, reviewing your finances to make sure you’re prepared for the future has never been more important and, for many, that will involve seeking some form of professional financial advice.”
Killik & Co associate investment director Rachel Winter says: “With UK inflation at a 30-year high of 5.4 per cent, the Bank of England arguably had little choice but to raise interest rates today for the second time in two months. Many households are struggling with rising prices and the Central Bank must do what it can to ease the situation.
“The cost-of-living crisis, exacerbated by soaring energy bills, a drop in real wages, and the rising cost of a weekly shop, is taking a toll on low-income families and individuals across the country. Input costs have gone up which is squeezing the profit margins of businesses at a time when they’re also having to contend with worker shortages due to the Omicron variant.
“Nonetheless, even if things appear bleak now, there are positive actions that can be taken in terms of personal finances. As inflation continues to erode the value of cash, those with long-term savings could consider investing in the stock market. Historically, the stock market has generated far better returns than cash over extended time periods. Those who are already invested could look at adjusting their portfolios to focus on stocks that could benefit from the current environment. Banks, for example, have performed well this year in anticipation of rising rates. Additionally, while rates are still relatively low, now is an excellent time to take advantage of fixed-term mortgages and loans.”
Aviva Investors head of rates Edward Hutchings says: “As expected the Bank of England hiked interest rates to 0.50 per cent, however with four members of the committee voting for a 50-basis point increase, there is certainly a hawkish skew. Further, with the announcement to unwind the corporate bond purchases, this will turn up the heat and focus on the unwind of Gilt purchases when interest rates hit 1 per cent. This now may well be sooner than when than most investors had initially thought and we could well see gilt yields move further higher from here.”
Aegon pensions director Steven Cameron says: “The Bank of England has voted for another 0.25 per cent interest rate hike to 0.5 per cent, the second consecutive increase, in a bid to stem the crisis of rising prices which are squeezing household finances. Inflation is currently sitting at the highest rate for almost 3 decades and is predicted to reach 7.25 per cent this summer, partly fueled by the new energy price cap from April even allowing for the Chancellor’s targeted support package.
“Today’s rise, if passed on to cash savers, will offer them a small glimmer of hope after seeing interest rates barely scraping above zero of late. But to put this in perspective, an extra 0.25 per cent interest on £10,000 savings will provide £25 a year, which won’t go very far towards the £693 energy bill increase an average household faces. Borrowers face an even gloomier future with further interest rate hikes likely this year making it increasingly more expensive to borrow money and pay off debt.
“Aegon research shows that over a quarter (27 per cent) of adults are concerned about the impact rising interest rates will have on repaying short-term loans, and over a third (35 per cent) are apprehensive about higher mortgage payments.”