This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
On 22 June 2023, the Bank of England (BoE) raised their interest rate (the base rate) again – this time, by 0.5% to now stand at 5%. Given that this is the thirteenth rise since December 2021, many people are asking how much higher the base rate could go.
The base rate has a big impact on the cost of borrowing for your high street bank. As such, when the BoE raises its rate, other UK banks are likely to raise their own. Whilst this can be good news for savers (who might see their regular savings rate go up), it can be bad news for borrowers – such as those with a variable mortgage.
In this article, our Burnley financial planners here at Elmfield explore what the 5% base rate might mean for you, what may lie ahead for rates and how this economic landscape could impact your financial planning going forwards.
What the 5% base rate means for you in 2023
First, the good news. With interest rates now at 5%, it may be possible to find a better interest rate for your savings. The best easy-access accounts now offer around 4.35% and it is also possible to find fixed-rate deals at 6%.
Another benefit is for those who are considering an annuity purchase. Annuity incomes tend to rise when the BoE rate goes up. This is because annuity providers typically invest in gilts (UK government bonds) which see yields go up along with interest rate rises.
Rising interest rates could also benefit certain investors. For instance, higher rates tend to strengthen the pound against other currencies, potentially boosting UK-based stocks as foreign investment to Britain is more incentivised. A stronger pound is also nice if you are going on holiday, boosting your spending power abroad!
Conversely, rising interest rates can also be bad news. New loans will cost more, making it harder for business founders to raise capital. Payments will rise on adjustable-rate loans (e.g. variable rate mortgages), reducing borrowers’ disposable income.
For some homeowners, a higher BoE rate is particularly worrying. Around 1.4m people who entered a fixed-rate deal in 2020 or 2021 (before rates started rising) are now seeing their deal coming to an end. When the clock runs out, the mortgage market will likely present them with much higher interest rates.
What could lie ahead for UK interest rates?
The BoE is currently optimistic that it can get the UK inflation rate back down to 2% by the end of 2024. If inflation moves in this direction, then the Bank will face pressure to start bringing interest rates back down.
Of course, whether or not this target will be achieved is up for debate. The market is still pessimistic, believing inflation has already proven more stubborn than expected (8.7%) and the forces driving higher UK prices are unlikely to change any time soon.
Different analysts predict various “peaks” for UK interest rates in 2023 – ranging from 5.5%, 6% and 6.5%. The risk of a UK recession rises in line with higher forecasts for interest rates.
How can I plan for UK interest rates?
Savers should be wary of a potential “tax trap” with their interest rates. Whilst you may be tempted to try and get the highest rate possible, be careful to plan accordingly for your Personal Savings Allowance (PSA).
A basic rate taxpayer can earn up to £1,000 from interest each tax year (e.g. cash savings) without paying income tax on it. For a higher rate taxpayer the tax-free threshold is £500.
In April 2016, the former could have held around £68,966 in an easy-access savings account (paying 1.45%) before the PSA was breached. Now, it might only take £25,000 from the best-paying savings accounts to exceed the tax-free threshold.
Speak with a financial adviser to plan your taxes accordingly. Some options to consider include moving interest-generating assets into an ISA, or investing certain cash savings into Premium Bonds. The latter offers the chance of a monthly prize draw rather than interest payments.
Homeowners might face difficult decisions about how to plan for their mortgage. If you are on a variable-rate deal, for instance, should you “lock into” a fixed-rate deal now before rates potentially rise even further? Or, is it better to wait in hope that rates might come back down?
These are not easy questions and it can help to speak with a professional to explore your options. One primary goal is to ensure that your monthly payments will remain affordable even if rates go up to 6%, 6.5% or more in the year or so ahead.
Finally, given that the UK faces a higher risk of recession with additional interest rate rises, it is worth checking that your finances are robust. If you have expensive debts (e.g. credit cards) it may be worth prioritising paying these off – or, trying to reduce the interest level.
Building up a personal safety net – e.g. 3-6 months’ worth of easy-access savings – is also a good target for many people. This will help you if you fall behind with bills or if hard times befall you, such as redundancy.
Invitation
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you.
Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938
