RACHEL RICKARD STRAUS: The Bank of England’s reassurances about inflation are starting to ring hollow
Imagine a friend comes to stay at your house unannounced. If they told you, “Oh, don’t worry about me, I’m just passing through,” how long would you expect them to stay?
A couple of days? Weeks maybe? Months, in no time? You’d feel pretty left out if it was two years.
But that’s what happened with soaring inflation, which came in unwanted and unannounced two years ago this month.
Rising cost of living: Since May 2021, inflation has felt very much at home
It was in May 2021 that the cost of living, as measured by the consumer price inflation rate, broke above the Bank of England’s target of 2 percent for the first time.
Since then, inflation has felt very much at home. Month after month, it has driven up the cost of our household bills and eaten away at our grocery budget. We wish it would just move.
Still, the Bank of England persisted in its message that inflation is transient – in other words, it will pass.
These reassurances are starting to ring hollow in households. And last week the financial markets also started to doubt this.
Mortgage fears
Mortgage lenders began to push rates back up amid fears that inflation would not fall quickly and that the Bank of England would eventually raise rates higher than previously forecast to counteract this.
Analysts are forecasting the Bank of England’s key interest rate to hit 5.5 per cent in January – some say it could be higher. It’s already near a 15-year high at 4.5 percent.
Some mortgage lenders stopped new loans altogether while they figured out what was going on in a highly volatile market.
All this means more pain for homeowners, who are seeing the cost of borrowing rise again. Average two- and five-year fixed-rate mortgages are now 5.38 percent and 5.05 percent, respectively, according to analysts MoneyfactsCompare.
When inflation was just setting in, some lenders offered rates less than 1 percent. Homeowners as a result of remortgaging from such deals are ready for a nasty shock. So what to do?
First of all, remember that inflation is only destructive if it rises faster than your income.
And, as my colleague Jessica Beard reports on pages 28-9, millions of former public sector employees benefit from retirement income that keeps pace with inflation. The state pension also rose by 10.1 percent last month, because it is also immune to inflation. And if the cost of living remains high, it will rise again next year.
Switch to save
Second, if you are a saver, now is not the time to sit on your hands. If Sylvia Morris reports on this, there are deals up to 5 percent to be had. These will not beat inflation, but they do provide partial protection.
But you don’t get them by hoping your existing provider does the right thing and raises your rate. It won’t be, especially if you save at a High Street bank. You have to shop around.
Third: make ample use of all your tax-free allowance. Very few savers have had to pay taxes on their interest over the past decade as rates have remained in the doldrums. But that’s changing fast and might surprise you.
If you earn up to $50,270 a year, you don’t pay tax on the first $1,000 in savings interest, but 20 percent on everything above that. If you found a savings account that pays out 5 per cent, you would start paying tax on interest if you saved just over £20,000.
If you earn between £50,270 and £125,140, you pay 40 per cent tax on savings interest above £500. That means you only need to have a small amount of more than £10,000 in a savings account and earn 5 per cent interest to pay tax.
If you earn more than £125,140, you pay 45 per cent tax on all savings interest. That equates to getting a rate of just 2.75 percent if you put your money in an account and pay 5 percent.
Income tax brackets will remain frozen until at least April 2028, so millions more will be paying taxes on their savings by then.
Use that Jesus
Protect your savings by putting it in an ISA. You can funnel away up to £20,000 each tax year – this allowance has never been more costly. We may be stuck with inflation for a while, but that doesn’t mean we should give it a bath and give it full access to our savings. Protect what you can.