The Bank of England (BoE) has voted to increase the base rate of interest from 0.25% to 0.50%, marking the first increase in the rate since 2007.
The move had been widely expected, with Bank of England governor Mark Carney giving several hints about a rise over previous months.
According to pricing strategists Simon-Kucher, the move will increase the operating profit of UK banks by 3.1%, or £274m, over the next twelve months.
According to the company: “The gain for shareholders is expected to come as banks increase the lending rates immediately, but deposit rates only gradually and by a lower amount. We can expect the banks to immediately increase the interest charged on new loans and those on variable rates by the full 25 basis points (bps), giving a boost of about £1.26 billion in their interest income for the coming year.”
In contrast, Simon-Kucher said a saver who manages to get the entire 25bps increase on £10,000 of deposits, would stand to make just an additional £25 over a year.
So for consumers, the net result will be higher interest charged on loans, with only slightly higher interest from their savings. One issue is that consumer debt levels are currently extremely high, with large swathes of the population boasting only small amounts of savings.
According to the Financial Conduct Authority’s (FCA) Financial Lives study, young people may be disproportionately affected by this.
The youngest generation given in the study, those between 18 and 24, almost a third had unsecured debt, not including student loans, while 20% had no cash savings. When the report was released, the FCA wrote: “One in nine (11%) 18 – 24 year olds are already in difficulty, and a further two in five (41%) are surviving. Lack of financial resilience for these 18 – 24 year olds is driven by low to no savings. Small increases in rents or mortgage payments would mean many more would struggle. One in twenty (5%) could not cope with any increase in such outgoings, while a further one in five (18%) would struggle if payments went up less than £100 a month.”
The situation does not improve for the 25 – 34 group, 23% of whom the FCA classified as over-indebted. The FCA noted: “They are the most likely age group to not pay off their running‑account credit balances every month or most months, suggesting that many are struggling with their debt commitments.
“Their fledgling earnings, low savings, and high average debt levels mean that levels of financial resilience are significantly lower among 25 – 34 year olds than they are in the population as a whole.”
The next generation up, 35 – 44 year olds, also have a significant struggling with debt, with 21% ‘over-indebted’, and relatively low savings.
Although today’s rate increase sees it remain at an extremely low level, Michael Ellington and Costas Milas, from the London School of Economics and Political Science wrote in a blog that it will likely only be the first of a number of increases, which the Bank will need to do in order to meet the inflation target over the medium term.