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Peer2Peer Finance News | January 18, 2019

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A boost for savers? Interest rates hiked for first time in a decade

A boost for savers? Interest rates hiked for first time in a decade
Marc Shoffman

INTEREST rates have been increased for the first time in a decade, prompting speculation about whether savers may start seeing better returns.

The Bank of England’s monetary policy committee increased the base rate from 0.25 per cent to 0.5 per cent on Thursday, the same level as in August 2016.

Comparison website Moneyfacts said the increase could be better news for savers, with the average easy access savings account currently standing at 0.39 per cent, compared with 4.05 per cent in July 2007.

Read more: Inflation hits a five-year high

“Today’s rate decision may see some savers jump for joy, as it marks the first positive base rate move in more than 10 years. However, savers may want to hold back on the celebration, since the link between base rate and savings rates seems to be severed,” Charlotte Nelson, finance expert at Moneyfacts, said.

“Given it’s been such a long time since the market has seen a base rate rise, it is very difficult to tell whether providers will increase their rates straight away or decide to wait and see what the rest of the market does before making their move.

“Anyone looking for a savings deal now will need to keep on their toes and check the best buys to ensure they are still getting the best rate.”

However, Angus Dent, chief executive of business peer-to-peer lender ArchOver, suggested the rise has come too late.

“This rate rise of 0.25 per cent is largely symbolic. At the same time, it’s also a year too late,” he said.

“Dropping the interest rate below 0.5 per cent was the wrong decision in the first place. The Bank should have pushed rates up to 0.75 per cent as a show of strength that would have driven inflation down as the pound rose.

“Although this rise is unlikely to have any major material effects, it is a return to the trajectory we should have been on for the past year, and a good sign for a bolder policy.

“For many, the move towards a higher interest rate will simply mean business as usual.”

He said savers need to branch out from traditional vehicles to get better returns.

Read moreBank of England urged to delay rate rise

While the rise is seen as potentially good news for savers, commentators warned that home owners on tracker mortgages and small businesses accessing loans may face increased costs.

“Today’s interest rates rise will likely be the first of many,” Graham Toy, chief executive of the National Association of Commercial Finance Brokers, said.

“Some of the more insightful SMEs may well have factored an interest rate hike into their financial plans but with interest rates having been so low for so long, many SMEs will have just assumed the benign cost of borrowing will continue.

“If we are now heading into a period of small, slow and steady rate increases, this is likely to become an important factor in the future plans for many businesses.

“Lenders will already be stress testing affordability by applying a stress test to anticipate a rate increase. An increase in the interest rate is likely to impact affordability tests whether based on the pay rate or stress test. This, in turn, is likely to impact on a business’s ability to obtain finance.”

Read more: Inflation hitting higher income households hardest