Another blow for borrowers as interest rates stay at 16-year high

The Bank of England (BoE) have as expected held interest rates at 5.25% which is another blow for borrowers.

The Monetary Policy Committee (MPC) voted for the seventh time in a row to hold the base rate.

The MPC voted 7-2 in favour to keep rates at 5.25%.

Mark Hicks, head of Active Savings at investment platform Hargreaves Lansdown, said: “Right now, you can still earn more than 5% on everything from easy access accounts to those fixed for up to two years.

“Unfortunately, most people won’t be making anything like this, because high street easy access branch rates are far less generous, and in most cases, they pay less than inflation (currently 2%).

“At times like this it’s key to check out the rates from online banks and savings platforms, which tend to pay more than the high street giants.”

Victor Trokoudes, founder and CEO at smart money app Plum said, “The markets predicted that a cut in the base rate was unlikely this month, and they have been proven right. With a General Election just a couple of weeks away, the Bank of England perhaps had even more reason to be cautious and not give any impression of a political ploy during the campaign period.

But, even if an election had not been called, holding the base rate at 5.25% would have still been likely. Despite inflation finally hitting the BoE target of 2% this week, April’s higher-than-expected inflation print suggests that the drop isn’t yet consistent, and forecasts expect inflation to creep back up soon. And services inflation did not fall as much as expected, decreasing to 5.7% rather than the predicted 5.5%.

Combined with wage rise levels remaining sticky, this will have made the BoE’s monetary committee hesitant to push forward with a rate cut. Positively for the BoE, sterling has been steady, despite expectations that the UK would cut rates quicker than the US, helping to ensure import costs remain more stable.

“Now, the pressure to cut rates is growing. Productivity remains stagnant and growth has flatlined. Consumer spending is stuttering against a backdrop of bad weather and accumulated cost of living pressures biting hard, potentially exacerbated by the uncertainty created by the calling of a General Election.

“This will be a real concern for the BoE as it looks to balance the threat of a recession against a need to continue their battle against inflation. Holding rates seems to have been the most sensible option this time round, but with the election done and dusted next month, the demand to cut the base rate may become undeniable.

Consumer analysis

“Inflation has now hit the Bank of England’s 2% target, which will be a relief for the Government. Although this will take some time to filter through to people’s day-to-day spending, it’s a positive sign that the price increases of consumer goods are starting to level off, especially when it comes to the weekly food shop.

And this impact needs to happen urgently, especially as consumer prices have risen by 20% overall since inflation was last at target in July 2021.

“Consumer confidence is low, with the latest Money and Credit report showing net consumer credit borrowing decreasing. Meanwhile, figures from UK Finance show that outstanding balances on credit cards are increasing at a rate of 9.9% in the 12 months to March 2024, half of which are incurring interest.

“At the same time, the longer rates remain high, the more people move onto more expensive mortgage deals and are forced to stretch their finances even further.

An estimated 1.6m people will need to remortgage this year alone and will find themselves facing a huge increase in rates, while mortgage arrears hit an near 8-year high. For example, the quoted monthly interest rate on a 2-year fixed mortgage LTV 75% was 2.63% in May 2022. The quoted mortgage rate for the same type of product two years later has nearly doubled to 5.19%. For a 25-year £200,000 mortgage, that means an extra payment of £281.05 per month (£1191.43 vs £910.38).

“But there are still good deals to be had on savings. Thanks to high interest rates, it has become a lot easier to mitigate the effect of inflation on savings, with many easy access saving accounts and Cash ISAs delivering returns well in excess of 2%. It’s important to shop around and make sure you are getting the best deal possible to make the most of your savings while rates are high.”