Interest rate hike: This is how Bank of England’s decision will impact YOU | Personal Finance | Finance
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This hike – from 0.5 percent to 0.75 percent – marks the highest interest rate level since March 2020, as the Bank of England responded to the likelihood that the ongoing war in Ukraine will send inflation soaring to around 10 percent this year. And with inflation already skyrocketing as it reflects the cost of energy, the Office for Budget Responsibility (OBR) has warned that interest rates could reach as high as 3.5 percent before 2023.
So what does this mean?
In simple terms, the interest rate – also called the bank rate – is adjusted in line with inflation in order to balance the economy.
If too many people buy too many things, the cost of those things go up – that’s inflation.
Interest rates are designed to keep inflation steady – to prevent people from spending all their money at once and driving up costs.
Essentially, interest rates make it more expensive to borrow money through credit cards, mortgages and loans, and therefore deter consumer excess.
In this way, the Bank of England has long relied on increasing or decreasing interest rates to balance inflation – in 2008, when the financial crisis hit, interest rates dropped to historic lows, where they have remained ever since, in order to encourage people to spend money and stimulate the economy.
READ MORE: ‘Welcome relief’ for pensioners in interest rate decision
Now, however, prices need to cool. Wages aren’t keeping up, and a perfect storm of consumer spending after lockdowns, rising wholesale energy prices and the brutal war in Ukraine mean the Bank has had to raise interest rates three times in the past four months alone.
Entrepreneur and investor Neil Debenham told Express.co.uk: “The Bank of England knows the rising cost of living has to be managed in the short-term.
“Raising the rate of interest does have consequences, however. Theoretically, a hike should reduce inflation by curbing consumer spending.
“However, given the current market uncertainty, it is difficult to assume a modest rise will have any immediate or prolonged impact on the economy.”
He added: “With the country keen to progress past the pandemic, the last thing anyone wants is the risk of a global economic recession at this precarious time.”
So what does this mean for homeowners?
Interest rate hikes are always unwelcome news for borrowers. If interest rates go up, there’s a chance your loan repayments will too – though this isn’t necessarily going to happen overnight.
In the UK, around 74 percent of mortgage borrowers are on fixed-rate deals, meaning the interest rate adjustments to their monthly payments won’t come into effect until the end of their current term.
However, the other 26 percent of homeowners in Britain are on either a standard variable rate (SVR) or a tracker deal – these are the people most likely to feel an impact right away, as their repayments are directly linked to the Bank of England’s interest rate.
According to the banking trade body UK Finance, a 0.75 percent interest rate hike will push up monthly repayments for those on tracker deals by an average of £25.76.
And those on an SVR are looking at an increase of £15.96 per month, right away.
What about first-time buyers?
First-time buyers will be understandably worried at this latest news from the Bank, but it’s not all hopeless.
In October last year, as brokers eyed up an inevitable interest rate hike in the wake of Covid lockdowns, experts said a rise in mortgage rates, while inevitable, would be “slow and measured”.
Simon Gammon, managing partner at Knight Frank Finance, said at the time: “The market is now alive with talk that interest rates are set to rise and all signs suggest the best products available are on borrowed time.
“Though any hikes are likely to be slow and measured, this is the lowest mortgage costs are likely to be for some time.”
What about your savings?
Penny-pinchers are often the ones who benefit most from interest rate hikes, as it drives up interest on savings, too.
However, experts are warning savers not to get too excited, as any improvement in saving rates will be swallowed by the decrease in spending power of the savings themselves due to inflation.
In fact, experts have said that the value of savings has actually been falling for some time.
According to the website Savings Champion, the average interest rate for an easy-access account you can open today is 0.2 percent, up from 0.17 percent in December.
The highest paying easy-access account has an interest rate of 0.84 percent, up from 0.71 percent in December.
Even on the higher end, these rates mean savers are seeing just pennies for every hundred pounds saved for a year or more.
Today’s interest rate announcement will do little to change that.
Savings Champion spokeswoman Anna Bowes said it was “really disappointing” how slow a lot of providers have been to react to the Bank of England’s base rate rises.
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