What does the Bank’s rate decision mean for your finances?
UK households who were hoping for a rate cut today may be disappointed after the Bank of England held interest rates at four per cent.
The decision came amid concerns surrounding high inflation ahead of Chancellor Rachel Reeves’ crunch Budget later this month.
Governor Andrew Bailey, who had the deciding vote, said he would “prefer to wait” before backing further cuts, with the Bank’s Monetary Policy Committee voting 5-4 to hold interest rates at 4 per cent.
Alice Haine, personal finance analyst at Bestinvest, said: “The decision to pause came despite a backdrop of sluggish economic growth, weak productivity, rising unemployment levels and the looming prospect of a tax-raising autumn Budget.
“Amid this uncertainty, policymakers have zoned in on tackling persistent inflation, which has been creeping up since May, a consequence of increased employer costs following the Chancellor’s last tax-raising Budget.”
To borrow or not to borrow
The implications of the decision will be mixed for UK households, depending on individual financial situations.
While savers may welcome the prospect of higher returns for a period of time, borrowers, in particular those shouldering large mortgages and substantial debt, are unlikely to share this sentiment.
Borrowers will continue to face the strain of elevated repayments on both home loans and personal debts, while those looking to take out a loan will not yet be able to get their hands on cheaper deals.
This means prospective house buyers may want to wait for both the outcome of the Budget and December rate cut before making a decision on whether to make a purchase or take out a loan.
Mortgages could feel the blow
Homeowners who have large mortgages from ultra-low fixed rates before the Bank began hiking interest rates at the end of 2021, may also be feeling gloomy over the decision.
Haine said: “Many five-year deals secured in late 2020 or 2021, when rates were at record lows, are now expiring, so household budgets will need to adjust to accommodate higher repayments.”
She noted that anyone emerging from a low-rate deal “would be wise to lock in a new product quickly” rather than wait for borrowing conditions to further ease, in particular with the ongoing volatility caused by the approaching Budget that is shaking the housing market.
Rumours of a mansion tax have sent house owners with properties over £2m into a tailspin, which would see them face a charge of one per cent on anything over that amount.
However, estate agent Savills, predicts the decision is unlikely to trigger a major disruption to the lower end of the housing market.
Research director Frances McDonald, said: “Combined with more relaxed mortgage rules, which allow some buyers to borrow a larger multiple of their income, and a materially stronger UK economy beyond 2026, we expect renewed upward pressure on house prices.
“Our latest forecast predicts that UK average house prices are set to rise by 22.2 per cent by 2030.”
Savings rates and pensions
Cash savers may be breathing a sigh of relief over the decision, as saving rates will be held. But as interest rates keep dropping and inflation stays sticky, real returns will ultimately continue being eroded.
Sally Conway, savings expert at London-listed Shawbrook Bank, said: “Savers will be relieved that the predicted cut in interest rates hasn’t materialised this month.
With inflation flattening, predictions are that cuts are on the horizon, making apathy a big risk.”
“There are still competitive savings rates on the market and savers need to take advantage before any further cuts occur.”
Yet rumours over a potential slash of the ISA ceiling to £10,000 in order to push more Brits into the stock market are growing, making the option less appealing.
While this may encourage some to invest in the stock market, risk-averse savers can look toward topping up a pension in a bid to invest for the long term.
Pension contributions are the most popular option for saving for retirement, but also grant investors 20 per cent tax relief and are not subjected to capital gains tax, allowing Brits to grow capital quicker than other savings options.