According to a report released on Monday, the increase in interest rates has caused over £2 trillion of wealth to vanish from British households in the past year. This decline in wealth is

primarily attributed to the drop in house prices and the devaluation of bonds, which has had a detrimental effect on pensions.

However, the Resolution Foundation, a think-tank, suggests that younger people might benefit from the partial reversal of the long-standing trend of increasing household wealth.

Since December 2021, the Bank of England has raised borrowing costs consecutively on 13 occasions, elevating its base rate from 0.1% to 5%. It is anticipated that interest rates will continue to rise in order to combat the highest inflation rate among the Group of Seven nations.

Ian Mulheirn, a Research Associate at the Resolution Foundation, stated, "The future trajectory of interest rates is highly uncertain. The current surge could be a temporary blip or mark the beginning of a new era for the UK. In any case, policymakers should prioritize determining whether and how households can be shielded from the unpredictable impact these forces have on their financial well-being."

The Resolution Foundation revealed that household wealth has plummeted by £2.1 trillion ($2.75 trillion) in the past year, reversing the remarkable growth experienced in recent decades, which had pushed wealth to £17.5 trillion in 2021.

This decline represents the largest decrease in wealth as a percentage of gross domestic product (GDP) since World War Two, plummeting from 840% to 650% by early 2023.

If interest rates remain high, the ongoing erosion of household wealth could bring an end to a 40-year surge in asset values, exacerbating the generational wealth gap caused by soaring house prices that have disproportionately favored older individuals while leaving younger generations behind, the report noted.

Furthermore, the foundation stated that younger people might also benefit from the higher interest rates when it comes to their pension savings.

"In these turbulent times, where assets have predominantly been held by older generations, we may witness rising interest rates reversing the growth of wealth disparities," highlighted Mubin Haq, the chief executive of abrdn Financial Fairness Trust, a partner organization of the Resolution Foundation that supports efforts to address financial issues. Photo by Katie Chan, Wikimedia commons.