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UK rate surge fuels biggest wealth drop in decades — study

By AFP - Jul 17,2023 - Last updated at Jul 17,2023

LONDON — The surge UK interest rates aimed at cooling elevated inflation has slashed the nation's household wealth made up mostly of home ownership and pensions, a study showed on Monday. 

Household wealth crashed by £2.1 trillion ($2.74 trillion) over the past year, the highest share of UK economic output since World War Two, according to Resolution Foundation, an independent think tank that co-authored the report.

However several interest-rate rises since late 2021 have resulted in falling house prices, benefitting younger people hoping to buy their first property, the study concluded. 

It added they would now also need to save less to achieve an income in retirement worth two-thirds of their final salary.

"Over the past four decades wealth has soared across Britain, even when wages and incomes have stagnated," noted Ian Mulheirn, research associate at Resolution Foundation. 

"But rapid interest-rate rises have ended this boom."

According to the study, pension wealth accounted for 43 per cent of household net wealth between 2018 and 2020.

Home ownership contributed a further 36 per cent. 

The Bank of England has ramped up interest rates 13 times in a row to the current level of 5 per cent in an attempt to dampen stubbornly-high inflation.

The move has sparked mortgage turmoil as commercial lenders lift their own rates on home loans, worsening a cost-of-living crisis.

"The short-term pain of higher interest rates for mortgage holders could also mean a longer-term gain for young people hoping to buy their own homes and saving for their pensions," said Mubin Haq, chief executive of the abrdn Financial Fairness Trust, which helped carry out the study.

"Both become more affordable and allow for a fairer sharing of wealth."

"In these turbulent times, when assets have tended to held by older generations, we may see rising interest rates reversing the growth in wealth gaps Britain has seen over recent decades," Haq added.

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