One year after the Bank’s interest rate reduction cycle in England, British households have not yet seen significant financial relief.
Despite four rate reductions since July 2024 and expectations for a fifth this week, the overall burden of consumers has increased, highlighting the complexity of the softening of monetary policy in a context of persistent inflation and structural economic challenges.
Savings suffer as rate reductions exceed mortgage loans
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Bloomberg’s analysis of the Banque of England shows that British households are collectively 11 billion pounds sterling (14.5 billion dollars) more despite an annual basis compared to a year ago.
The disparity stems from the fact that if banks and construction companies have quickly reduced interest rates on customer deposits, the advantages of the drop in mortgage rates have been slow to materialize.
The fall in savings yields cost households of nearly 5 billion pounds in the past year, affecting a wide range of accounts, including the ISA in tax franchise and various types of deposits.
The effective interest rate of time deposits has decreased by 0.4 percentage points since July 2024, while the target deposits dropped by 0.2 points – all in the middle of a savings pool totaling approximately 1.8 billion of sterling books.
On the other hand, the mortgage and not guaranteed costs increased by 6 billion pounds sterling per year.
Many owners are still locked in transactions agreed at higher interest rates, with approximately one million borrowers currently paying higher rates.
The bank believes that these people cannot benefit from cheaper loans before the expiration of their current conditions, a gap that could extend over the next two years.
Persistent cost pressure despite the softening cycle
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The reference rate of the Bank of England was 5.25% in July 2024 – the highest level since the global financial crisis.
While the central bank has since lowered rates to 4.25% and is expected to reduce 25 additional basis points to 4% this Thursday, the impact on financial conditions remains limited.
Consumers – who drive around 60% of the British economy – seem cautious.
According to the GFK research group, the United Kingdom savings index jumped in July to its highest reading since 2007, reflecting growing preferences for spending savings.
This trend is aggravated by fears of future tax increases following budgetary measures introduced by Chancellor Rachel Reeves in April.
Economists note that the slowness of rate reductions, coupled with their delayed transmission in borrowing costs in the real world, softens the planned stimulus.
Ing James Smith said that “the impact of rate reductions will be very progressive”, in particular in an environment of softening glacial policy.
Inflation and uncertainty of the clouds perspective policies
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Adding to the challenge, inflation remains an urgent concern. Prices in July increased at a 17 -month summit – exceeding the May of the BOE forecast – pulled in part by energy costs and other occasional factors.
Although they may not reflect persistent inflationary pressure, political decision-makers remain suspicious of side effects, in particular salary increases that could prolong price instability.
The effective interest rate on mortgage actions of 1.7 Billion of Sterling Books from Great Britain has in fact increased by almost 0.2 percentage points in the past year, despite the flexibility efforts of the Central Bank.
This gap illustrates how the legacy of past rate increases continues to weigh on households.
For the future, markets and analysts expect the BOE to continue its current rate of a rate drop per quarter, which reduces the policy rate to around 3.5% by spring 2026.
But with always high inflation and consumer feelings, the path of monetary policy can offer short -term limited relief for households in difficulty.
