Mortgage holders will feel the pinch from higher interest rates but may not benefit from the same increase in Savar returns, experts warn as the Bank of England raises rates to pre-epidemic levels.
The official interest rate has returned to 0.75 per cent after the central bank raised rates three times in a row, rising from a historic low of 0.1 per cent. The bank’s rate-makers are under pressure to control inflation, which reached a 30-year high of 5.5 percent in January.
About 2 million homeowners on variable mortgages face higher monthly payments as a result of the rate hike. Lenders have shown a slowdown in mortgage revaluations despite repeated rate hikes but no longer have a chance to exploit the rise in their margins, analysts warn.
Borrowers should expect a sharp rise in mortgage rates over the next year, said Andrew Wishert, a senior property economist at Capital Economics Consultancy. In February, the bank’s margins narrowed to their lowest level since 2007, so lenders are likely to “slightly rebuild their margins as mortgage refinancing in response to the sharp rise in market interest rate expectations in recent months,” he said.
Sir Howard Davis, chairman of NatWest Banking Group, which has 19 million personal and business customers, said before the bank’s announcement today that savers would have “some pass-through” high interest rates, but it was unlikely to pass.
“There will be some pass-through but the market is very competitive at the moment so I don’t think it’s going to be one-on-one, depending on the rate at which we’re growing today,” he said on BBC Radio 4’s Today program. Davis, who served as deputy governor of the central bank between 1995 and 1997, added that interest rates could have been higher if the bank had worked earlier this autumn to tackle inflation.
The bank’s monetary policy committee voted 0.25 percent in today’s meeting, warning that inflation could double before the end of the year.
Inflation is now expected to reach 8 percent next month, up from the central bank’s forecast of 7.25 percent last month. Officials warn, however, that in October, when households receive their gas bills, which are calculated based on energy prices in the first half of the year, inflation could be “several percentage points” higher than its February estimate. The utility price cap, which rose 54 percent in April, could be “significantly higher” again when it is reset in the fall, central bank officials said.
British families have faced the greatest pressure on living standards in decades, with home payments falling more than fivefold since the 2008 financial crisis.
Raising interest rates increases the cost of borrowing and gives higher returns on savings. It aims to encourage people to save rather than spend, reducing demand and theoretically costing. The bank’s target inflation rate is 2 percent.
Despite the start of the war in Ukraine and the rise in global oil and gas prices since its last meeting in early February, the bank has downplayed the possibility of future rate hikes.
Officials say that if the war in Ukraine continues to push the economy, high global energy prices will drag revenue and spending into the UK. The war will disrupt global supply chains and increase uncertainty over the outlook for the economy, they said, adding: , May be slow. “
Sage Sunak, the chancellor, is under pressure to introduce tax breaks and spending plans in his spring statement on Wednesday next week. The statement, which was not intended to be a “mini-budget”, is expected to introduce new policies to help families and businesses cope with rising living costs.