Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The overall boost to UK savers’ incomes from higher interest rates outstripped the impact of increased mortgage payments on households, according to new research from the Resolution Foundation think-tank.
The Bank of England’s decision to raise rates between December 2021 and August 2023 resulted in a £16bn income boom for savers, the research released on Friday showed.
Real income from savings rose by £34bn over the period — more than offsetting the £18bn rise in debt interest costs. The boon accounted for three-fifths of all household income growth since the last quarter of 2021, the research found.
The think-tank said the windfall from higher interest rates was “unprecedented” in recent UK economic history and internationally but noted the gains had been higher for wealthier savers.
“The impact of the unlikely income boost has been very uneven — older, asset-rich households have gained the most, while younger mortgagor households have been hit hard,” said Simon Pittaway, senior economist at Resolution Foundation.
He also warned borrowing costs were “likely to reduce” income on savings in the year ahead “presenting a fresh living standards challenge in an election year”.
In the past two years the central bank has raised rates from a historical low of 0.1 per cent to a 15-year high of 5.25 per cent in an attempt to combat surging inflation.
The think-tank said the proportion of households on variable rates has been shrinking and that this had been a key driver of the income boom.
With a higher proportion of households on longer-term fixed-rate deals the overall pass-through from interest rate rises to mortgage costs had slowed.
Some 37 per cent of households that had a mortgage when the central bank started raising rates in 2021 were on fixed-rate deals which had not yet ended.
The research also found that household debt would continue to rise in 2024, and around 1.5mn mortgagors will see their annual mortgage expenses rise by £1,800 on average when their fixed-rate deals end this year.
In contrast with the delayed impact on mortgage costs, the gains from higher savings interest had been more immediate.
The windfall was boosted by “forced savings” accumulated during the pandemic when parts of the economy shut down.
UK savings have been falling back from their pandemic peak. The income boom for savers is expected to decline in 2024 as the trend continues, and could be almost completely unwound by the end of year even if the central bank starts to cut interest rates.
Markets expect the BoE will start cutting rates from the spring to 3.75 per cent by the end of 2024.
Similar rate-rising cycles have delivered only a modest income boost in the eurozone and an income fall in the US because of a surge in non-mortgage interest payments.
Source: Economy - ft.com
