Savers may not benefit from Bank of England decision to raise interest rates

Mortgage holders will feel the pinch from higher interest rates but savers may not benefit from the same rise in returns, experts have warned as the Bank of England raised rates to pre-pandemic levels.

The official interest rate has returned to 0.75 per cent, up from a historic low of 0.1 per cent, after three consecutive rate rises by the central bank. The Bank’s rate setters are under pressure to contain inflation, which hit at a 30-year high of 5.5 per cent in January.

Around 2 million homeowners on variable mortgages face higher monthly payments as a result of the rate rises. Lenders have been slow to reprice mortgages despite the repeated rate rises but no longer have the scope to absorb the increase in their margins, analysts have warned.

Andrew Wishart, a senior property economist at the Capital Economics consultancy, said borrowers should expect a sharp rise in mortgage rates over the next year. In February, banks’ margins fell to their narrowest since 2007 so it is likely lenders will “rebuild their margins a little as they reprice mortgages to account for the sharp rise in market interest rate expectations in recent months,” he said.

Sir Howard Davies, chairman of the NatWest banking group, which has 19 million personal and business customers, said before the Bank’s announcement today that there will be “some pass-through” of the higher interest rate to savers but it is unlikely to be passed over in full.

“There will be some pass-through but the market’s very competitive at the moment so I don’t think it’s going to be one for one, depending on the rate rise we get today,” he told BBC Radio 4’s Today programme. Davies, who served as deputy governor of the central bank between 1995 and 1997, added that interest rates may end up higher than they would have been had the Bank acted earlier last autumn to tackle price rises.

The Bank’s monetary policy committee voted to raise rates by 0.25 per cent in today’s meeting, warning that inflation could enter double digits before the end of the year.

Inflation is now expected to reach 8 per cent next month, up from the central bank’s forecast of 7.25 per cent last month. Officials cautioned, however, that inflation could climb “several percentage points” higher than its February projections in October when households receive their gas bills, which are calculated based on energy prices in the first half of the year. The utility price cap, which is due to rise by 54 per cent in April, could again be “substantially higher” when it is reset in autumn, central bank officials said.

British households face the biggest squeeze to living standards in decades, with take-home pay set to fall by more than five times the amount it did in the aftermath of the financial crisis of 2008.

Raising interest rates increases the cost of borrowing and offers a higher return on savings. It is intended to encourage people to save rather than spend, reducing demand and, in theory, prices. The Bank’s target rate of inflation is 2 per cent.

The Bank played down the likelihood of future rate rises despite the onset of the war in Ukraine and rising global oil and gas prices since its last meeting at the beginning of February.

Officials said that if shocks to the economy from the war in Ukraine persist, higher global energy prices will drag down income and spending in the UK. The war is likely to worsen global supply chain disruptions and increase uncertainty over the outlook for the economy, they said, adding: “Global inflationary pressures will strengthen considerably further over coming months, while growth in economies that are net energy importers including the United Kingdom, is likely to slow.”

Rishi Sunak, the chancellor, is under pressure to introduce tax breaks and spending plans in his spring statement on Wednesday next week. The statement, which was not originally intended to be a “mini-budget,” is expected to introduce new policies to help households and businesses to cope with the rising cost of living.