Savings Growth Lessens Mortgage Pain for UK Households.
* Homeowners are protected from BOE rate rises by fixed rates.
* A £10 billion rise could make the BOE’s fight against inflation more difficult.
Because returns on savings are increasing more quickly than the cost of mortgages, UK household spending is holding up better than anticipated.
Bloomberg’s analysis of data from the Bank of England may shed light on why Governor Andrew Bailey and his team are having trouble controlling the highest inflation rate among Group of Seven economies. Higher rates benefit households collectively by about £10 billion ($12.7 billion) a year.
The dynamic may make it more difficult for monetary policy, which primarily functions by reducing household spending power, to be transmitted. Because so many homes are on fixed rates that have not yet expired, the effects of rate increases on homeowners are being postponed.
Because over 85% of the stock of mortgages are fixed-rate, Samuel Tombs, chief UK economist at Pantheon Macroeconomics, noted that the effective interest rate on bank deposits has increased more fast than the effective rate on the stock of debt.
Saver income now is £24 billion higher per year than it was in November 2021, one month before the BOE started its most aggressive rate-hiking cycle since the late 1980s. Mortgage borrowers are increasing their interest payments by £14 billion.
According to anecdotal evidence, consumers are currently net beneficiaries overall. In spite of the rise in mortgage rates, respondents to GfK’s June consumer confidence barometer said that their personal financial status had significantly improved previous month.
The homeowners‘ reprieve, though, won’t last long. Think tank Resolution Foundation foresees a £5 billion mortgage crunch in 2019 when about 1.5 million fixed deals expire.
According to the data, interest rates may not be as effective as a tool for monetary policy as they were in 2008, when the stock of mortgage debt was far higher than bank deposits. Now the opposite is true since during the pandemic when there were few opportunities to spend, savers added about £200 billion to their accounts.
“The income effect over the next year is probably positive,” said Simon Ward, an economist for Janus Henderson Investors. While some households would experience financial hardship as a result of rate increases, affluent people and many pensioners will fare better.
In addition, Ward noted that higher rates encourage saving while discouraging spending, and that overall expenditure may still be lower because the impact on borrowers is typically greater than that on savers. The wealth effect of superior returns may make savers on the best bargains eager to spend other income even when they are unable to access their funds for a set length of time.
The stock of loans’ average mortgage rate has increased from 2% in December 2021 to 2.82%. New 2-year fixed mortgage offers, meanwhile, can cost more than 6%. Fixed savings rates have increased from less than 1% to more than 3%.
The founder of MoneySavingExpert.com and consumer advocate Martin Lewis has accused banks of defrauding clients by neglecting to pass on rate increases to quick access accounts.
He claimed last week that “some big banks pay under a pitiful 1% while most people should be earning at least 4%.” Banks are now required by Chancellor Jeremy Hunt’s mandate to pass rates on to savers with rapid access.
The funds that British households accumulated during Covid lockdowns have seldom been touched, according to a separate analysis by Deutsche Bank. British households have retained their excess savings and are now earning higher returns on their stockpiles, whereas households in the majority of the industrialised world have been depleting their excess savings—the amount over and beyond pre-pandemic levels.
By the end of last year, excess savings in the UK had increased to almost 11% of GDP. US households, on the other hand, have used up all of their supplies.