The rise in interest rates has reduced household wealth in Britain by more than 2 trillion pounds over the past year as a result of falling property prices and bond values that have hurt pensions.
Younger people, however, could gain from the partial reversal of the decades-long rise in household wealth, according to the Resolution Foundation think tank.
Since December 2021, the Bank of England has increased borrowing costs 13 times in a row, bringing its base rate from 0.1% to 5%. It is anticipated that it will continue to do so in order to reduce the highest inflation among Group of Seven countries.
Research Associate at the Resolution Foundation Ian Mulheirn stated that the future course of interest rates is “extremely uncertain.”
“The current increase may be a passing trend or signal a new era for the UK. In either case, policymakers should concentrate more on the question of whether and how to protect households from extreme fluctuations in their financial situation due to these external pressures.
According to the Resolution Foundation, household wealth has decreased by 2.1 trillion pounds ($2.75 trillion) in the past year. This is in contrast to prior decades’ remarkable growth, which brought wealth to 17.5 trillion pounds in 2021.
The decline constituted the largest decrease in wealth as a percentage of GDP since World War Two, going from 840% to 650% by early 2023.
A 40-year asset boom that has exacerbated generational inequality by raising housing prices that benefited older people but excluded younger people would come to an end if interest rates remain high, it was stated.
According to the foundation, younger people may also profit from greater rates on their pension funds.
“We may see rising interest rates reversing the growth in wealth gaps in these turbulent times when assets have tended to be held by older generations,” said Mubin Haq, chief executive of the abrdn Financial Fairness Trust, which supports works to address financial problems and is a partner of the Resolution Foundation.
