The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 20 March 2024, the MPC voted by a majority of 8–1 to maintain Bank Rate at 5.25%. One member preferred to reduce Bank Rate by 0.25 percentage points, to 5%. Alice Haine, Personal Finance Analyst at Bestinvest by Evelyn Partners, the wealth manager, explains what it means for you.
The Bank of England’s decision to hold the benchmark interest rate at a 16-year high of 5.25% for the fifth consecutive time was widely anticipated by the markets. But with inflation falling more than expected to 3.4% the big question remains: how soon before the central bank makes its first interest rate cut?
Alice Haine, BestInvestThe financial markets have been betting on rate cuts this year, but when this will happen exactly has been a topic of much conjecture. For now, however, the BoE is sticking to its guns and holding rates at a 16-year high as it waits for more concrete evidence that inflationary pressures have been well and truly stamped out.
The latest 3.4% inflation figure for the 12 months to February came in lower than forecast but an even bigger downward shift is on the cards in April when the next reduction in the Ofgem Energy Price Cap kicks in. The BoE expects the inflation number to finally fall slightly below its target rate of 2% in the second quarter for the first time since 2021. If that happens, the central bank will have even more impetus to push ahead with a rate
cut.
Hints of the shifting sentiment were evident in the rate-setting Monetary Policy Committee’s split decision, with eight in favour of holding the status quo and one calling for a rate cut. This is a slight change in stance from the MPC’s last 6-3 voting pattern when six voted to leave rates unchanged, two voted for a quarter-point increase and one opted for a rate cut.
TIGHTENING CYCLE
Household finances have seen their fair share of ups and downs since the BoE began its rapid tightening cycle in December 2021 in a bid to ringfence rampant inflation, hiking the base rate 14 times from a record low of 0.1% to the current level of 5.25%. This sent borrowing costs to sky-high levels leaving many household budgets in dire straits.
While some are saddled with large overdrafts and outstanding debts on personal loans and credit cards – liabilities they have built up by paying everyday bills – others are struggling with higher mortgage repayments with the proportion of mortgages falling into arrears on the rise.
STRESSFUL
Consumer borrowing costs on credit cards, loans, overdrafts and car finance have shot up since the BoE’s rate-hiking cycle first began. Relying on credit to fund everyday living costs can be very stressful for households when the cost of servicing debt remains so high, but this is the reality for many as the economy tentatively eases out of the cost-of-living crisis.
Inflation may have tumbled from its 41-year high of 11.1% in October 2022, but it remains above the BoE’s target of 2%. This means borrowing costs will remain high for now because the central bank has a delicate balancing act to navigate – continue curbing inflationary pressures while also giving households and the wider economy breathing space to grow.
Rate cuts would certainly deliver a shot of relief to borrowers, particularly those weighed down by oversized mortgages. Higher borrowing costs have led to many new buyers taking on longer mortgage terms of more than 30 years in a bid to keep repayment costs down.
EDGED BACK
While mortgage rates eased dramatically in January as lenders went to war in a bid to secure new business and retain existing clientele, they edged back up again in February as lenders repriced their products amid the uncertain interest rate outlook.
Hints that interest rate cuts are coming down the line may hopefully spur lenders into rolling out more attractive mortgage offers once again – something that would benefit first-time buyers and those looking to refinance alike. While those emerging from cheap deals taken out before the BoE began its rate-hiking programme may be stung with higher repayments, at least the pain won’t be quite as bad as it could have been if their product
had expired last summer.
Those signing up for a fresh deal would be wise to consult a mortgage broker to help them secure the best offer possible. Remember, buyers can lock in a deal up to six months before they need it to start and can then update their rate as many times – provided better options come online – as they need to before the product term begins.
HIGH RATES
Thanks to high interest rates and easing inflation more savers are now enjoying a real return on their savings pots. While the savings market has featured a mix of rate rises and falls in recent weeks, with interest rate cuts in the pipeline, savers may suddenly see the best deals disappear fast. Anyone with money sitting idle in accounts offering dismal returns should lock in a top fixed-rate deal while they still can.
While hunting out the best return possible is always a good strategy for cash savings, be wary of how much you load into your account as you may find yourself paying tax on savings interest because you have breached your Personal Savings Allowance*, which has remained frozen since 2016 when savings rates were much lower. Savers with larger cash pots could consider a more tax-efficient option such as an Individual Savings Account (ISA), which allows savers to stash up to £20,000 each tax year without incurring tax on interest or capital gains.
There are just 15 days remaining until the tax year ends at midnight on April 5, a point when this valuable tax-free allowance expires, so savers should act fast to ensure they don’t miss out. Remember, the £20,000 tax-free allowance applies across all types of ISA, so a savvy saver could store a small share of their savings in a high-interest Cash ISA for short-term savings goals and stash the rest in a Stocks & Shares ISA for financial
goals with a time horizon of five years or more to take advantage of longer-term investment returns.
