People walk in Greenwich Park, with Canary Wharf in the distance, in London, Britain June 22, 2023. REUTERS/Hannah McKay/File photo
LONDON – The jump in interest rates has wiped more than 2 trillion pounds off household wealth in Britain over the last year due to the fall in house prices and the value of bonds which has hit pensions, a report published on Monday showed.
But the Resolution Foundation think-tank said younger people could benefit from the partial reversal of the decades-long climb in the value of household wealth.
The Bank of England has raised borrowing costs 13 times in a row since December 2021, taking its base rate from 0.1 percent to 5 percent, and it is expected to keep on raising rates to bring down the highest inflation among Group of Seven nations.
READ: Bank of England hikes rates to 5% in surprise move to tackle stubborn inflation
“The future path of interest rates is very uncertain,” Ian Mulheirn, Research Associate at the Resolution Foundation, said.
“The current surge could be a blip, or herald a new era for the UK. Either way, policy-makers should focus more on whether and how to insulate households from wild swings in their fortunes from these forces well beyond their control.”
The Resolution Foundation said 2.1 trillion pounds ($2.75 trillion) had been lost in terms of household wealth over the last year after an unprecedented surge in recent decades which took wealth to 17.5 trillion pounds in 2021.
The fall represented the biggest drop in wealth as a share of gross domestic product – from 840 percent to 650 percent by early 2023 – since World War Two.
If interest rates stay high, the continued erosion of household wealth would end a 40-year asset boom that has aggravated generational inequality caused by rising house prices which helped older people but left out younger people, it said.
READ: Tax wealth to pay for Britain’s pension and healthcare spending – think tank
Younger people could also feel the benefit of higher rates on their pension savings, the foundation said.
“In these turbulent times, when assets have tended to be held by older generations, we may see rising interest rates reversing the growth in wealth gaps,” said Mubin Haq, chief executive of abrdn Financial Fairness Trust, which supports work to tackle financial problems and a partner of the Resolution Foundation.
($1 = 0.7642 pounds)