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UK Households Reap £16 Billion Windfall From Higher Interest Rates - BLOOMBERG

JANUARY 06, 2024

BY  Philip AldrickBloomberg News

(Bloomberg) -- UK households have gained £16 billion ($20.3 billion) from higher interest rates as returns on savings since the Bank of England started tightening policy two years ago more than offset the increased cost of debt, according to the Resolution Foundation.

In contrast to the four rate-hiking cycles of the 1980s, 1990s and 2000s, the increase in rates since December 2021 to 5.25% from 0.1% handed Britons an “unprecedented windfall” that amounted to three fifths of all household income growth over the period, the think tank said. 

Higher rates would normally bear down on spending by lifting debt payments more than the income on savings. The impact reversed this time because many mortgage borrowers were on fixed-term deals that insulated them from rate rises, and because roughly £200 billion of extra saving was set aside during lockdowns in the pandemic.

The analysis helps explain the resilience of the UK economy in the face of the most aggressive rate-hiking cycle since the 1980s.

The BOE had forecast a recession for 2023 but GDP grew 0.3% in the year to the third quarter, the latest official figures show. With inflation falling faster than forecast, markets expect a first rate cut in May and for further reductions in the second half of this year.

The income boost from higher savings was £34 billion, compared with the £18 billion rise in debt interest costs, Resolution said. That left a net gain of £16 billion. 

It may be entirely unwound by the end of this year, though, as nearly two-in-five households that had a mortgage when the BOE started raising rates have yet to refinance. Around 1.5 million mortgagors face an extra £1,800 annual bill on average this year as their fixed-rate deals expire, Resolution said.

The gains were not evenly spread either. Resolution said older households were the biggest beneficiaries. The average household headed by someone aged 65-74 has three times more savings than a one headed by someone aged 35-44 and seven times less debt.

Many households have no savings at all, meaning they have borne the full brunt of higher interest rates at a time of a wider cost-of-living crisis.


(Adds chart, context on savings)


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