Bank of England warned of ‘excessive damage’ to economy after interest rates held | Personal Finance | Finance
Bank of England warned of ‘excessive damage’ to economy after interest rates held (Image: PA)
The Bank of England Base Rate will remain unchanged at 5.25 percent, sparking increasing concerns about the potential impact of these 15-year high-interest rates on the economy.
Jatin Ondhia, CEO of Shojin, said: “The Bank of England is walking a tightrope. Understandably, it is unwilling to loosen its grip on inflation by dropping rates any time soon. But it also has to be careful not to inflict excessive damage on the UK’s contracting economy.”
The latest Gross Domestic Product (GDP) figures recorded no growth for the UK economy in the three months to October. Instead, GDP fell by 0.3 percent, with analysts suggesting “the worst is yet to come”.
Mohsin Rashid, CEO of ZIPZERO, commented: “Pockets across the country remain pinched. Holding the Base Rate steady will certainly save many Britons from another punch to the gut, but it won’t repair the damage of the many blows that have come before.
“With their financial well-being eroded by years of fiscal chaos, much more must be done to support those still struggling under the twin burdens of high-interest rates and high inflation.
The Bank of England Base Rate will remain frozen at 5.25 percent (Image: Getty)
“Whether it means relief packages from the Government or retailers doing more to keep prices fair and manageable – ideally a mixture of both – what matters most is that it happens now.”
However, Mr Ondhia highlighted that the decision to hold the rate provides a “degree of certainty” for Britons in the short-to-medium term and that the timing “couldn’t be better”.
He explained: “The New Year always brings about a renewed focus on finances as people set their investing, saving and spending goals.
“Higher interest rates are likely to lead more people towards the wide array of ISA products available, but diversification will be another key trend to watch in 2024, with real estate a perennially popular asset.”
He added: “Diversifying one’s savings and investments can help hedge against economic volatility, and as the Bank of England continues along the tightrope, preparing for potential volatility next year will be on many people’s agenda over the coming months.”
Andy Mielczarek, founder and CEO of SmartSave, a Chetwood Financial company, described the impact of the continued freeze on rates as having entered a “period of stability” where interest rates are concerned.
However, he noted: “There is no room for complacency as people consider their financial plans for 2024. For the first time in 15 years, the Base Rate is residing above inflation, and savers must consider how they can take advantage of this shift.
“Crucially, we must remember that a higher Base Rate is not a guarantee of greater returns on saving pots. Many banks and many savings products – easy-access accounts in particular – are still offering returns that do not even match the 5.25 percent Base Rate, let alone better it.
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“So, whether savers consider switching products, providers, or both, it is up to consumers to assess their options and seek out the best returns possible.”
Holding the rate is also “likely” to bring more confidence to the UK housing market, estate agency Savills has said.
Frances McDonald, director of research at Savills, commented: “The Bank of England’s decision to hold Base Rate at 5.25 percent is likely to bring more confidence to the UK housing market. Over the past year, higher mortgage rates have led to price sensitivity and lower levels of transactions, and a market which had been dominated by cash and equity-rich buyers.”
But while it appears interest rates may have peaked, Ms McDonald said: “The first cut still looks someway off. That means heightened affordability pressures are likely to result in further, but more modest, house price falls in the first half of 2024.”
She added: “Savills expects the market to bottom out mid-way through next year as mortgage rates start to ease more significantly in anticipation of a Base Rate cut later in the year.
“Already we have seen some confidence return. More stability in the mortgage markets led to an improvement in activity levels in November. TwentyCi data for the month suggests that agreed sales (net of fall throughs) are back to within three percent of their pre-pandemic 2017 to 2019 average, having lingered at around -15 percent below this level for much of the year.”
The “winners” in this high-interest rate environment are savers, Alice Haine, personal finance analyst at investment platform Bestinvest said.
She explained: “The average easy access savings rate [has risen] to 3.18 percent from 0.2 percent in December 2021, with the best deals still topping the five percent mark.
“Now is the time to act, however, if savers don’t want to miss out on the top rates before they disappear. While fixed-rate deals of six percent plus became a feature in the summer months, these offers have already disappeared and with rate cuts expected next year, savings rates are likely to ease further from here.
“Savers with money sitting idle in accounts offering dismal returns should nab a top fixed-rate deal while they still can.”
This warning comes as recent research from Shawbrook Bank has found a staggering 40 percent of savers aren’t aware of the interest rate their account is earning, with many still investing in products paying less than two percent.
Adam Thrower, head of savings at Shawbrook, said: “While savers are still benefitting from some of the best rates we’ve seen in a decade, the decision to maintain the status quo signals a warning sign for anyone who hasn’t moved their money recently.
“A staggering 40 percent of savers remain in the dark about the amount of interest they’re currently earning, if any, strongly indicating that their potential earnings may be falling far short of what they could be. Today’s favourable rates are not permanent, and with each passing month, we edge closer to the possibility of interest rates decreasing, so savers should be careful and make the most of their money now.”