Alice Haine, Head of Personal Finance, Hargreaves Lansdown:
“The Bank of England’s decision to leave the headline rate unchanged at 3.75% for the fifth consecutive meeting may have been widely anticipated by the markets, but that will offer little comfort for households burdened with high living costs.
Despite easing consumer prices, softer wage growth and a lacklustre but stable jobs market, the Monetary Policy Committee’s decisive 6-3 vote to maintain the current position – with three members in favors of a hike - indicates that policymakers remain cautious about the inflation outlook.
Households may have taken comfort from an easing headline inflation rate in the 12 months to June, which undershot forecasts at 2.6%, alongside the new Prime Minister’s pledges to tackle the cost of living, but this is set against a backdrop of renewed conflict in the Middle East and the inflationary pressures wrought by rising oil prices.
Higher energy prices raise the risk of rate hikes, so households should consider the implications for their own finances. While rates were held today, markets continue to price a potential for at least one, or even two rate hikes before the end of 2026 in the UK. This is interesting as most economists we speak to think there will be no change to rates this year.
This difference is likely due to investors hedging the risk of any potential increase in what is an uncertain economic environment. Judging how the Iran conflict will play out from here and the resulting impact on inflation is very difficult, particularly as US President Donald Trump has recently brought tariffs back onto the table.
There is clear potential for a rate rise before the end of 2026. But on balance it’s more likely that the UK will enter 2027 with interest rates at 3.75%.
What this means for:
Household finances:
Interest rates have a far-reaching impact on everyday finances, from mortgage payments and debt costs to returns on cash savings. While savers may welcome the prospect of higher returns for longer, borrowers hoping for additional relief from high mortgages or oversized debts may feel less optimistic.
Importantly, it is anticipated that inflation will rise in the coming months, and the latest 2.6% print is only a temporary reprieve, even if Middle East tensions do reduce. Despite PM Andy Burnham’s temporary VAT removal on electricity bills from October 1, overall energy bills are not expected to fall from that date as the Ofgem Energy Price Cap is expected to increase by more than the saving.
The bottom line is that household budgets remain under pressure. Living costs are still high, and borrowing costs remain elevated compared with the long era of ultra-low interest rates that followed the Global Financial Crisis. Combined with the stealth impact of frozen income tax thresholds, this is making it harder for some households to balance the books.
For mortgage holders, rates on pause won’t deliver an immediate impact to those locked into fixed-rate deals with some time left to run, but first-time buyers or those looking to refinance may be more concerned about the possibility of future rate hikes. Mortgage approvals may have edged up in May, reversing in part the sharp drop recorded in April, but activity is expected to remain subdued in the coming months as higher borrowing costs weigh on affordability.
Mortgage rates eased in June as markets grew more optimistic about the outlook for interest rates following the US-Iran ceasefire. However, renewed tensions in the Middle East have reignited concerns about inflation, prompting several high-street lenders to raise mortgage rates in recent days.
Anyone looking to sign up for a new mortgage or refinance an existing deal would be wise to lock in a new product quickly rather than wait for borrowing conditions to improve further. You can typically begin the remortgaging process six months before your current deal ends. Once a new product is secured, keep in close contact with your broker as they can often switch you to a better rate right up until two weeks before the term starts, if conditions improve.
Savings
Keeping interest rates on hold at 3.75% is positive news for savers as it means money held in cash can work harder for longer. Savings rates have been gradually drifting lower since peaking in the Autumn of 2023, but with inflation easing to 2.6% in June, savers can still secure inflation-busting returns of up to 5% on both easy-access and fixed options.
This is why anyone with money languishing in an account paying a meagre rate of 1% or less would be wise to explore more competitive options for their money. Few things are more frustrating for savers than seeing inflation quietly erode the value of their cash. For those who struggle to track their saving rates, an aggregator that actively sources and tracks the best rates on your behalf could be a time-saving solution. Aggregators, such as the HL Active Savings offering, typically let savers compare and choose multiple savings rates from a wide range of lenders, with account-holders able to hold a mix of different rates to suit different savings goals, and switch between deals with ease.
It is also important to consider the post-tax returns of your savings, particularly as frozen tax thresholds pull more people into higher income tax bands over time. This is where tax efficiency really matters. Too much money held in a regular bank or building society account increases the risk of breaching the Personal Savings Allowance and paying tax on savings interest.
Interest earned outside an ISA over the personal savings allowance – that’s £1,000 for basic rate taxpayers and £500 for higher rate taxpayers – is subject to income tax at 20% and 40%, respectively. Additional rate taxpayers pay tax on every penny of interest outside a tax wrapper, at 45%. And from April next year, tax rates on interest will rise by 2% to 22% for basic rate taxpayers, 42% for higher rate taxpayers, and 47% for additional rate taxpayers.
A more tax-efficient savings strategy can help mitigate this. Savers can shelter up to £20,000 in an ISA, in cash or investments, this tax year, shielding any interest from tax on interest or gains. Remember that ISA reforms will see the Cash ISA allowance capped at £12,000 for those aged under 65 from April 2027, so savers looking to move bank or building society cash pots into a more tax-efficient space may want to bear that deadline in mind.
Maximising the Cash ISA entitlement before ISA reforms take effect is important for money needed in the short-term. But once there is enough cash set aside for any short-to-medium term obligations, in addition to an emergency pot to cover three-six months of emergency expenses, it is important to ensure other funds are allowed to work even harder. Using a Stocks & Shares ISA to invest cash not required for near-term needs can turbocharge returns. Money invested in the financial markets, particularly equities, has historically delivered higher real returns than cash over longer periods, albeit with some volatility in the short term.
Investors typically need a time horizon of at least five years to ride out market ups and downs. So, while there are periods when holding cash makes sense, such as saving for a short-term financial goal, relying too heavily on cash over the long-term risks missing out on the inflation-beating returns that a well-diversified investment portfolio can deliver.”
Pensions
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown:
“Today’s interest rate hold is good news for anyone in the market for a guaranteed retirement income, as annuity rates remain robust. Interest rates are a key factor behind annuity rates, and we’ve seen them soar skyward in recent years as the Bank of England has hiked rates. They’ve remained robust even as interest rates have fallen back and they currently hover just under all-time highs. The latest data from HL’s Annuity Search Engine shows a 65-year-old with a £100,000 pension can get up to £7,912 per year from a single life level annuity with a five-year guarantee.
If you are looking to secure a guaranteed income, it’s important to do your research. Different providers offer different rates, so if you accept the first quote offered, you might not be getting the best income. Once bought, an annuity can’t be unwound, so you could be left to regret a hasty decision for a long time to come. Taking the time to use an annuity search engine to get quotes from across the market is a step closer to making the right choice."
Notes to Editors
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