Bank of England’s ‘Shock’ Rate Rise: A Blow for Mortgage Holders, A Win for Savers

Jun 26th 2023

The Bank of England’s decision to raise the interest rate to 5% is putting pressure on mortgage payers in the UK but savers are set to benefit from the bank’s hawkish policy.

Given the latest inflation data, it wasn’t really a surprise.

On Thursday, the Bank of England announced it was raising the base rate from 4.5% to 5%.

This is the highest level it has been in 15 years and a larger rise than most forecasters had expected in the past few weeks (they were betting on a 4.75% base rate). But, with inflation data standing at 8.7%, and core inflation being the highest in 31 years, the central bank’s Monetary Policy Committee (MPC) felt it had no other choice but to continue its base rate rise.

Economists said the central bank is forcing the UK down the recession hole – shrinking the economy to stave off inflation to reach its 2% target– which would typically mean people spend less, and save more. The Bank of England’s governor Andrew Bailey didn’t deny this, highlighting a “persisting” inflation. “We are not expecting, we are not desiring recession but we will do what is necessary to bring inflation down to target,” he told media following the MPC’s announcement.

Theoretically, savings rates should continue to rise. The MPC, in its statement, signalled support for further interest rate rises, despite other countries working towards slowing down interest rate rises, or cutting them down altogether. Economists expect the central bank to carry on raising borrowing costs, with polls suggesting the Bank of England could bring the base rate to 6% in the next few months.

“If there were to be evidence of more persistent pressures [in inflation], then further tightening in monetary policy would be required,” the Committee said in its minutes.

While this is putting pressure on mortgage payers in the UK, savers (individuals as well as corporates) further benefit from the latest rate rise. Banks are already paying higher returns on longer-term savings products, and we anticipate this trend will continue, and spread to shorter term savings products.

“With 6.10% already available to savers who can lock up savings for three years, the Bank of England Base rate hike by 50bps to 5% means it is only matter of time till we see that available in the 1-year maturity,” Paul Richards, Insignis Cash Chairman, highlighted.

And this trend is set to continue.

“Core inflation is higher in 14 EU countries and interest rates are rising around the world, but the lesson from other countries is that if you stick to your guns, you bring inflation down,” UK Chancellor Jeremy Hunt said.

Banks are putting their rates up – in what we see as the fastest response to any MPC announcement. Banks on our platform have already raised their one-year term rate to above 5.60%.
With banks meeting early next week to set new saving rates, we are expecting more one-year term edging closer to 6%. The central bank is set to announce its next move on 3 August.
Now is the time for UK savers to benefit from the Bank of England’s latest decision