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How market chaos has impacted UK household finances

The recent market chaos is set to pose a further challenge amid the cost of living crisis. Photo: Carl Court/Getty
The recent market chaos is set to pose a further challenge amid the cost of living crisis. Photo: Carl Court/Getty

The market chaos fuelled by the collapse of the pound and UK government bonds in the wake of the government's historic tax-cutting plan has exposed vulnerabilities in the world of finance.

Prime minister Liz Truss on Thursday doubled down on the package of tax cuts announced by chancellor Kwasi Kwarteng in last week's mini-budget.

Read more: What happened to the markets in the 60 minutes Liz Truss was on the radio?

Truss who insisted economies and currencies around the world were facing pressures, said she was prepared to take "controversial and difficult decisions" to get the economy moving.

This saw the Bank of England (BoE) step in after a looming pension funds crisis threatened to push the bond market into a downward spiral.

Here's how the current market volatility is impacting household finances.

The pound fell to a record low against the dollar following Kwasi Kwarteng's mini-budget last week. Photo: Matt Cardy/Getty
The pound fell to a record low against the dollar following Kwasi Kwarteng's mini-budget last week. Photo: Matt Cardy/Getty

What is happening?

The £45bn tax-cutting plan has rocked markets, which has seen the pound tumble to a record low against the dollar and a sell-off in gilts and stocks.

The Bank of England's £65bn intervention in the bond market on Wednesday followed warnings of cash calls in the pensions market that could potentially spark mass insolvencies.

Read more: Pound v dollar: How hedge funds benefit from a weaker sterling

Threadneedle Street's move seeks to prevent a domino effect in the City by temporarily suspending plans to offload £80bn of gilts held on its own balance sheet.

Instead it will buy long-term gilts until 14 October at a rate of £5bn per day using newly created money in a process known as quantitative easing.

Watch: PM Liz Truss defends mini-budget amid market turmoil

How does it affect your pension?

The Bank of England is widely expected to take drastic action at its next interest rates meeting in November to bring rampant inflation back to its 2% target.

Inflation rose to 9.9% in August, hovering near 40-year highs, as the cost of food, fuel and energy surge.

Amid pressure on the government to help lower income households, the chief secretary to the Treasury Chris Philp, refused to confirm whether pensions and universal credit would be uprated in line with inflation — a promise former chancellor Rishi Sunak made while in office.

Sunak said back in May this year that it would uprated by this September’s Consumer Price Index (CPI), subject to a review by the Work and Pensions (WP) secretary.

Read more: Bank of England: What will the emergency action actually do?

Under the triple lock mechanism, state pensions are uprated by whichever is highest of 2.5%, wages and inflation.

Inflation is expected to be by far the highest factor this year putting pensioners in line for a potential increase of 10% or more.

Last year the triple lock was suspended with pensioners receiving a 3.1% increase. Truss has previously pledged to keep the triple lock.

With inflation surging, many pensioners were banking on a big increase from next April to help them manage, Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown said.

"These comments will cause real concern among pensioners who were banking on getting an inflationary increase to their state pension next year under the triple lock," she added. "Many pensioners have been left struggling with their finances as the cost of energy and food has soared and their incomes have been unable to keep up."

Read more: Why has the pound fallen and what does this mean for you?

Benefits

Benefits payments are set to fall in real terms under the government's plans to reassure the City that it will control spending.

Typically the WP secretary needs to review the level of benefits.

Under the Social Security Administration Act 1992, if prices have increased over the review period, the government should increase certain benefits by at least this rate for the next tax year.

Charities have warned that U-turning on the commitment to increase benefits in line with inflation would lead to disabled people "starving and freezing in their own homes".

"If the government U-turns on this promise, it would be devastating and lead to disabled people starving and freezing in their own homes," James Taylor, director of strategy at disability equality charity Scope, said.

Watch: How does inflation affect interest rates?

What about mortgages?

A record number of the UK’s mortgage deals have been withdrawn from the market since last Friday’s mini-budget, with house prices expected to fall as much as 15%.

Analysts have warned that the BoE must raise interest rates by 100 basis points in November, followed by a 0.75% hike, to win back the confidence of the markets, or risk exacerbating the pound crisis.

Imran Javaid, analyst at Credit Suisse, said: "A failure by the BoE to respond aggressively to the fiscal package in November is likely to worsen the confidence problem that the UK is facing and risk further sterling weakness, continued rates volatility, and higher risk premiums."

"A dovish reaction would make markets price in much higher inflation and expectations that the BoE would have to hike to higher terminal rates, which can in turn worsen the severity of the recession, and weigh significantly on the housing market."

Read more: How a sinking pound will inflate mortgage debt for millions

Interest rates are expected to surge to 6% by 2023. As mortgage loans track the Bank Rate, the move could keep many first-time buyers from the property ladder and millions of homeowners in mortgage debt.

Around 2 million people in the UK on a tracker or variable rate mortgage could see their monthly costs go up even further as a result of higher interest rates due to the pound's crash.

Energy bills and the market turmoil

Energy bills and fuel costs are likely to rise when the pound falls as the price of the gas that is used in Britain is based on the dollar — even if it is produced in the UK.

In the face of rising energy bills, the prime minister and chancellor have both said they will crack on with the government's "Growth Plan" to boost Britain's economy.

"We are sticking to the growth plan and we are going to help people with energy bills," the UK chancellor told the PA news agency on Thursday. "Those are my two top priorities".

He said that the move was "going to help people with energy bills".

The chancellor last week confirmed plans to freeze UK energy prices at £2,500 from October for two years, along with a six-month equivalent scheme for businesses — set to cost £60bn in the first six months.

UK energy prices will be frozen at £2,500 from October for two years, prime minister Liz Truss has announced. Chart: Yahoo News UK
UK energy prices will be frozen at £2,500 from October for two years, prime minister Liz Truss has announced. Chart: Yahoo News UK

What it means for personal finance

As the falling pound is likely to push up inflation, it means savers are likely to lose more of the value of their savings once inflation is taken into account.

Leaving your money in a "high street easy access account paying less than half a percent, runaway inflation will very quickly consume the spending power of your cash", Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said.

She added: "Higher rates will also hurt borrowers on variable deals. Many credit card companies reserve the right to push up rates when the cost of doing business rises, so keep your eye out for notifications.

"Within the mortgage market, more than three quarters of people are protected by fixed rate deals. However, for anyone whose deal is expiring or on a variable rate, higher rates will add significantly to their monthly costs."

Watch: Why are gas prices rising?