Great news for savers: Interest rates set to rise this year – but warning to taxpayers
Interest rates: Guidance ‘had been met’ says Ramsden
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Interest rates have been fairly abysmal as a result of the Bank of England’s decision to decrease its base rate to a record low of 0.1 percent in April 2020 – which has not been changed since. However, good news could be around the corner for savers as it is thought interest rates could be set to rise imminently. The speculation has been intensified by comments made by Bank of England governor, Andrew Bailey, who suggested the Bank of England will “have to act” over rising inflation.
Laith Khalaf, head of investment analysis at AJ Bell, said: “The market is now expecting an interest rate hike by Christmas, largely thanks to the inflationary pressures which will inevitably follow the energy crisis, and some markedly hawkish rhetoric from the governor of the Bank of England.
“According to interest rate markets, there is now an 85 percent chance of a rate rise this year, and a 60 percent chance of a hike at the next MPC meeting in November.
“Markets are pricing in tighter policy because the energy crunch could prompt a dramatic U-turn on interest rate policy at the Bank of England.
“There does certainly seem to have been a significant shift in rhetoric coming from the Bank, but there may yet be some prevailing factors which push an interest rate rise into next year.
“The Bank’s rate setters will want to see what the economy looks like after the sticking plaster of furlough has been properly removed, and how much legs the energy price crunch has left.
“The Bank may well be wary that rising energy costs will act as a brake on economic growth, which will do a similar job to an interest rate hike, thereby alleviating the need for tighter policy just yet.”
However, according to Mr Khalaf, there is also a human element to consider within this shift, equally as important.
He continued: “The Bank’s interest rate committee voted unanimously to keep interest rates on hold less than a month ago, so a 2021 rate rise would require a pretty humbling collective shuffle across the aisle.
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“It’s also important to note that elevated inflation right now doesn’t necessarily undermine the Bank’s stated view that it is transitory.
“As of their last forecast, the Bank was expecting inflation to rise to four percent this winter. That elevated level was consistent with a rate rise only in the back end of 2022.”
What are the impacts of a potential rate rise on Britons? Even if an interest rate hike is not enacted before the festive season, the impact of a rise, when it eventually rises will be significant for many.
Indeed, with this in mind, Mr Khalaf urged Britons to get used to the idea of tighter monetary policy in the future, something which financial markets are looking towards.
He added: “Savers and investors should therefore take stock of their finances, because an environment of rising interest rates is going to be a shock to many.
“Indeed a whole generation of young adults won’t even remember a time when bank rate started with anything other than a zero.
“Around 10 million people in the UK haven’t seen interest rates above one percent in their adult lives, seeing as the last time base rate was at this level was in February 2009.”
While an interest rate rise could be good news for those who are saving money, it is not a done deal that it will help them.
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This is because experts often state it takes banks slightly longer to pass on the benefit of interest rate increases to their customers.
Indeed, as interest rates rise, there could be a negative impact borne by the taxpayer, as the Government grapples with its finances – and this is important to consider also.
Mr Khalaf concluded: “In ‘normal’ conditions, rising rates only affect new Government borrowing, but today, the quantitive easing programme has effectively pegged £875billion of Government debt to the base rate.
“In its Budget forecasts in March, the OBR estimated that if interest rates were one percent higher, that would add £20.8 billion to the Government’s debt interest bill in 2025/26.
“To put that in some context, that would wipe out all the £8.2billion gain the Treasury expects from freezing income tax allowances, as well as a sizeable chunk of the £17.2billion projected to roll in from the rise in corporation tax.”
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