UK Households See Income Boost from Rising Interest Rates

In what might come as a surprise to many, recent research from the Resolution Foundation, a respected think-tank, has revealed an interesting twist in the UK’s economy. As the Bank of England increased interest rates from December 2021 to August 2023, UK households saw a significant boost in their incomes, primarily due to the benefits reaped by savers.

The Numbers Behind the Boost

This period of rising rates led to a whopping £16 billion income increase for those with savings. Overall, the income from savings climbed by £34 billion, more than making up for the £18 billion rise in debt interest costs. This growth in savings income contributed to three-fifths of the total household income growth since late 2021.

Uneven Impact Across Households

However, it’s important to note that this financial windfall hasn’t been evenly distributed. Simon Pittaway, a senior economist at the Resolution Foundation, pointed out that older, asset-rich households have benefited the most. In contrast, younger households with mortgages have faced tougher challenges.

Despite the current gains, there’s a cautionary note for the future. The income from savings is likely to decrease in the upcoming year, which could pose new challenges for living standards, especially considering the approaching election.

Historical Context and Mortgage Trends

The Bank of England’s rate hike from a historical low of 0.1% to a 15-year high of 5.25% was primarily aimed at combating surging inflation. Interestingly, the proportion of households on variable mortgage rates has decreased, leading to a slower pass-through of interest rate rises to mortgage costs. About 37% of households with mortgages were on fixed-rate deals as rates began to rise in 2021.

The research also indicates that household debt will continue to rise into 2024. Approximately 1.5 million mortgage holders will see their annual expenses increase by an average of £1,800 as their fixed-rate deals conclude this year.

The benefits from higher savings interest rates were immediate, in contrast to the more gradual impact on mortgage costs. This windfall was partly due to the “forced savings” accumulated during the pandemic shutdowns.

A Declining Trend

UK savings have started to fall from their pandemic highs, and the income boom for savers is expected to diminish in 2024. If the trend continues, and the Bank of England begins to cut interest rates, this boom could be almost entirely reversed by the end of the year.

This scenario in the UK stands out when compared internationally. Similar rate-rising cycles in the eurozone led to only a modest income boost, while in the US, there was an actual decline in income due to a surge in non-mortgage interest payments.

In summary, the UK’s unique economic situation has led to a temporary boon for savers, but the future remains uncertain, with potential challenges on the horizon.