Over the last few months, speculation that the Bank of England would increase its base interest rate has been mounting. However, the impact of Covid-19 has changed that, leading to the central bank making two cuts to the interest rate in quick succession.
Coinciding with the 2020 Budget, the base rate was cut from 0.75%, where it’s been since August 2018, to 0.25% on Wednesday 11th March. Just a week later, the rate was cut again on Thursday 19th March to just 0.1%. The latest cut represents a historic low, and it could have an impact on your finances.
The Bank of England base rate is the official borrowing rate of the central bank, affecting what it charges other banks and lenders when they borrow money. This then has a knock-on effect on personal finances.
Why has the Bank of England cut interest rates?
The rate cuts have been in direct response to the coronavirus pandemic.
As the virus has spread globally, it’s had a significant impact on economies. In the UK, non-key workers have been urged to work from home, pubs and other leisure facilities have been temporarily ordered to close, and many other businesses have taken the decisions to either reduce operations or suspend them. These are steps that are hoped to stem the spread and relieve pressure on the healthcare system but come at an economic cost.
The latest interest rate cut has increased its quantitative easing stimulus package and pumped more money into the UK economy. The aim of this is to calm the financial markets, which have experienced volatility over the last few weeks, and stabilise the economy.
In a statement, the Bank of England said: “Over recent days, and in common with a number of other advanced economy bond markets, conditions in the UK gilt markets have deteriorated as investors sought shorter-dated instruments that are closer substitutes for highly liquid central bank reserves. As a consequence, the UK and global financial conditions have tightened.”
The Monetary Policy Committee, which is responsible for setting the base rate, voted unanimously to increase the Bank of England’s holding of UK government bonds and sterling non-financial-grade corporate bonds by £200 billion, bringing the total to £645 billion.
But what does this mean for your finances? The impact will depend on whether you’re looking at borrowing or saving.
For some borrowers, the lower interest rate is good news. This is due to the cut lowering the cost of borrowing.
The area where you’re likely to see the most immediate impact is your mortgage if you have a tracker or variable rate one. A tracker mortgage, for example, tracks the Bank of England base rate, so your mortgage repayments should drop before your next payment. A variable mortgage tracks your lender’s interest rate, this will follow the trend of the Bank of England, and most borrowers will benefit from the full 0.65% drop, but it does vary. It’s worth checking with your lender about how your mortgage repayments will change if they haven’t already contacted you.
Unfortunately, those with a fixed-rate mortgage won’t benefit from the rate cut.
The years since the financial crisis have been difficult for savers. Low-interest rates over the last decade have meant savings aren’t working as hard as they may have done before 2008.
Interest rates on savings accounts are now likely to fall even further. When you factor in the pace of inflation, this means that many savings are likely to be losing value in real terms. This has a particular effect if you’re saving for medium and long-term goals. Inflation rising by a couple of percentage points each year can have a large impact when you assess the impact over ten or 20 years, for instance.
If you have a fixed-rate account, your interest rate and savings will be protected for the time being. However, if you have savings in other types of accounts, it’s likely the amount they earn will fall eventually. Banks must give existing customers at least two months’ notice of a cut, for current accounts and instant-access savings accounts.
For long-term saving goals, investing can help savings match the pace of inflation, maintaining your spending power. However, it’s important to note that investment values can fall and experience volatility, with the pandemic having an impact on markets too. As a result, it’s important to assess your financial goals and risk profile before making any investment decisions.
If you’re unsure what the base rate change means for you, please contact us. We’re here to help you adjust financial plans and goals as circumstances change, whether they’re within your control or not.
Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.