Interest rate increases adding to financial woes
The Bank of England says it hopes to avoid high levels of inflation becoming embedded in the UK economy. With wage inflation being fuelled by staff shortages, the Bank is using interest rate rises to try to bring inflation under control.
However, whilst higher interest rates are designed to control inflation by discouraging consumer spending, the current increase in prices are being driven by the rising cost of daily essentials.
So, an increase in interest rates is likely to simply add to people’s financial misery by increasing the cost of mortgages too.
The UK hit by a ‘perfect storm’
In many ways it’s the perfect storm, KIS Finance claims. Average electric and gas bills are expected to hit £2,000 a year when the government's price cap is raised next month. At the same time, food prices have seen the highest rise in nearly a decade.
Meanwhile, motorists are facing soaring petrol prices due to the rise in the cost of crude oil and the increase in National Insurance from April will put more pressure on the public’s already stretched budgets.
In addition, the war in Ukraine is already having an impact on the cost of fuel and other items, which is intensifying the cost of living crisis here in the UK.
Before the invasion, experts predicted that inflation would peak at 7.25% but the impact of the crisis means that many are now anticipating that we could see rates exceeding 8% in the coming months.
Over a quarter of people are already struggling financially
As the impact of rising inflation starts to bite, over a quarter of those surveyed report that they are struggling to make ends meet.
Whilst some inflation is needed to keep the economy running smoothly, the current rate is well in excess of the ideal level of 2% that the Bank of England aims to maintain.
With the Bank increasing interest rates to 0.75%, this will put further pressure on stretched household budgets, as mortgage and loan repayments increase.
Young people hit the hardest by rising costs
It comes as no surprise, then, that over 35% of those aged 18 to 24 are reporting that they are already struggling to get by financially.
Research by the think tank Demos has found that young people are currently the hardest hit and face the ‘greatest uphill battle’ to make ends meet. With potentially higher levels of debt and lower incomes, it’s this demographic that may find it the hardest to take on additional expenses as costs rise.
As their expenditure increases on day-to-day living, their ability to save is likely to be hard hit. For many, this will mean that the dream of saving a deposit to get onto the property ladder will now be even less of a reality than before.
36% of over 55’s worry that things will get a lot worse
Whilst younger people are already feeling the impact of the rising cost of living, those aged over 55 are the most worried about the impact on their finances in the coming months and anticipate finding themselves in difficulties soon.
Although they may have higher levels of savings, anyone who is thinking about retirement in the next few years may now be reconsidering whether they can afford to do so.
South East is feeling the pinch
Some 30% of those in the South East report already being in financial difficulties as a direct result of rising costs.
Whilst average wages may be higher, increases in living costs are being acutely felt by those living there. If interest rates now rise again, those with large mortgages will feel the pinch even more as monthly repayments increase alongside other rising costs.
Commenting on the findings, Holly Andrews, managing director at KIS Finance says: “The anticipated announcement by the Bank of England that interest rates are increasing to 0.75% will be a further blow to those trying to get onto the property ladder.”
“Shortages in the housing market are forcing prices up at the same time that rents are at some of their highest rates ever.”
Andrews says with the cost of borrowing increasing alongside the rising cost of living, those saving for a deposit will find this even more challenging.
She adds: “Similarly, those applying for a mortgage may find it more difficult to meet income requirements, as disposable income is hit by the rising cost of essentials.”
“With the potential for a further increase in interest rates this year the situation doesn’t look like it will ease for home buyers anytime soon.”