THE BANK of England raised the base rate to its highest level in nine years on Thursday - but what does the change actually mean for Scottish households?
Commentators have been split on its significance. Some believe increasing the rate from 0.5 per cent to 0.75% is signalling a return to expensive borrowing costs that will put much greater pressure on consumers.
But others believe the well-signposted rise will have only minimal consequences – either good or bad - for most of us.
The base rate was slashed over the course of the last big financial crash, from 5% in April 2008 to 0.5% by March 2009.
It has remained at that level ever since, bar a brief cut to 0.25% in August 2017 in the aftermath of the EU referendum.
By November last year, the base rate was back up to 0.5% and the Bank’s governor, Mark Carney, indicated the only way was up.
Now that he is making good on his promise, it seems not all consumers are prepared for it. According to last month’s HIS Markit Household Finance survey, only around one in 10 consumers believed a rate rise was imminent.
The base rate has traditionally been a benchmark for the interest rates set by banks and building societies. This means both borrowers and savers should be affected by Thursday’s announcement – but recent history suggests otherwise.
Many lenders were quick to pass on the last rate rise to mortgage borrowers, with rates hitting their highest level in two years by April this year.
The five million or so people in the UK with tracker mortgages, which are directly tied to movements in the base rate, are particularly affected, with just a quarter of a percentage point adding about £200 a year per £100,000 of an outstanding mortgage.
There are also around three million people in the UK with standard variable rate mortgage deals, which are also set to get more expensive in light of the Bank’s decision.
Meanwhile, households should not hold out for an automatic savings windfall to help balance the books.
Only half of savings accounts saw their interest bumped up by banks and building societies last year – and those that did only saw a rise of 0.2% rather than the full 0.25%.
It compounds a dismal decade for savers, who have been forced to take more risks with their money to make a decent return above inflation.
Currently no bank is offering more than 0.5% for instant access to savings – far below the current inflation rate of 2.4%.
Chris Dryden, senior insights analyst at Edinburgh-based budgeting site Money Dashboard, said saving among its users was falling year on year thanks to “consistently low” interest rates.
He added: “A marginal rate increase is unlikely to provide sufficient motivation to start saving again.”
However, one savings provider came straight out of the gate to offer higher interest rates on Thursday. Skipton Building Society said it would double the rate paid on its cash Lifetime Isa (Lisa) – one of only two such products on the market – from 0.5% to 1%.
This comfortably beats the 0.75% rate offered by Nottingham Building Society, which launched its own Lisa in June and is yet to confirm whether it will amend its deal to reflect a higher base rate.
The Lisa was the brainchild of former Chancellor George Osborne and was introduced 16 months ago to provide young people with a tax-efficient way to save towards a home or retirement.
Only available to the under 40s, the Lisa offers a tax-free shelter, either for cash savings or investment contributions worth up to £4,000 a year. The UK Government pays a 25% cent bonus on whatever is put in, up to the value of £1,000 per year.
The Lisa was recently lambasted in a report produced by the Treasury Select Committee, with MPs saying the product was likely to be mis-sold, risked undermining the existing pensions system and was unpopular with both the financial industry and the public. But the Treasury has firmly rebuffed recommendations to scrap the Lisa amid counter criticism that MPs did not consider enough evidence from younger Lisa savers as part of their inquiry.
Skipton has also revealed that it now has more than 112,000 Lisa customers, with total cash balances at £508.3 million as of June 30.
Those numbers are only likely to increase following the rate change on Thursday, especially as all Help to Buy Isas, which are also aimed at first-time buyers, will be closed to new savers by the end of next year.
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