With the Bank of England expected to cut interest rates this week, we take a look at how you and your family will be affected.
In response to the Brexit vote, it is widely expected that the Bank of England will move to cut interest rates as a way to ease investor worries and help prevent recession. The Monetary Policy Committee (MPC) have long been expected to increase interest rates after a historic low of 0.5%, however the EU Referendum result has significantly changed the financial landscape. But just how would you be affected if there is a decrease?
A cut in interest rates means that returns on cash investments also decrease. This could prompt investors to move their money to bonds or shares, making prices higher and cutting yields. Pension funds that are invested in bonds and shares stand to benefit as a result.
Those taking an income from an annuity may not be as fortunate however, as annuity rates are largely influenced by the yield on 15-year gilts. If a decrease in interest rates occurs, annuity rates are likely to fall. Employer-run pension schemes could also fall into deficit as a result of rate cuts.
Tracker mortgage rates would be cut automatically, as these rates are set to alter in accordance with the base rate of interest. A reduction in tracker mortgage rates would benefit several million borrowers. Fixed-rate mortgages could fall too, however the governor of the bank of England has said that mortgages could in fact rise despite interest rate reductions.
Borrowing and Saving
The uncertainty surrounding Brexit could create a level of riskiness of lending from the banks’ perspective. Lending could therefore be curtailed with higher costs being passed onto their customers.
With saving rates already at record lows, it is unclear about how much further they would fall. This depends on whether banks want to pass on cuts to mortgage borrowers, however these rates are still vulnerable to falling.