Bank of England rate cuts deliver £11 billion hit to households

[LONDON] Exactly one year since the Bank of England (BOE) started to cut interest rates, the pressure on households from the highest borrowing costs in a generation is still building.

Bloomberg analysis of BOE savings and mortgage data shows that Britons in aggregate are an annual £11 billion (S$18.8 billion) worse off than in July last year, despite four interest-rate cuts since then and the prospect of more to come.

Those reductions hit savers hard as banks and building societies were quick to respond by lowering rates paid on customer deposits. But homeowners are yet to benefit as many wait for mortgage deals locked in at higher rates to expire.

The findings underscore the challenge facing policymakers to ease financial conditions for households and revive Britain’s tepid growth rates as they gradually lower rates that stood at 5.25 per cent just a year ago, the highest since the onset of the global credit crunch.

Recovery hinges heavily on consumers, who contribute about 60 per cent of the British economy. Yet many still seem more inclined to hoard money than spend it due to fears of more tax hikes in the autumn. A savings index compiled by GfK surged in July to the highest level since 2007.

“The implication is that the impact of rate cuts is going to be very gradual, amplified by the fact that the pace of cuts is also pretty glacial,” said James Smith, developed markets economist at ING.

The UK central bank is widely expected to deliver a fifth quarter-point rate reduction to 4 per cent on Thursday amid signs that the labour market is weakening in response to Chancellor of the Exchequer Rachel Reeves’ April tax hikes and global trade tensions.

But with inflation at a 17-month high, and hotter than the BOE projected in May, governor Andrew Bailey is likely to re-emphasise the need for caution over the pace of future easing. While the uptick has been driven by energy bills and other one-off factors, policymakers worry that workers may respond by bidding up wages to protect their purchasing power with knock-on effects on prices.

Falling rates have cost households almost £5 billion in lost earnings on savings, including tax-free Individual Savings Accounts and time and sight deposits, according to calculations derived from the outstanding stock of cash deposits and effective interest rates over the past year.

At the same time, interest costs on mortgages and unsecured debt, such as credit cards, are £6 billion a year higher than 12 months ago. The BOE says that the roll-off onto higher mortgage rates has further to run, with a typical borrower facing an additional £1,300 in annual home-loan payments in the next two years. Around 1 million are currently fixed above prevailing rates, meaning they will have to wait to reap the benefits of cheaper borrowing costs.

The effective rate on Britain’s £1.7 trillion mortgage stock has risen by almost 0.2 of a percentage point since July 2024, just before the first BOE cut. However, the rate on time deposits has fallen by 0.4 and by 0.2 on sight deposits, reducing returns on a combined £1.8 trillion of savings.

Economists and traders expect the BOE to keep to its once-a-quarter easing cycle, putting rates on track to settle at around 3.5 per cent by next spring. That would still leave benchmark borrowing costs well above the sub-1 per cent levels seen in early 2022 before inflation took off into double digits.

“Alongside softer real pay growth and tighter fiscal policy, the lagged impact of past rate hikes on mortgagors will continue to weigh on consumer spending,” said Edward Allenby, UK economist at Oxford Economics. “The BOE’s rate-cutting cycle is unlikely to provide much of a tailwind for business investment and consumer spending over the next couple of years.” BLOOMBERG