Interest Rates Hike, Put Simply

Bank of England

By blog writer Michelle Blick

Earlier this November, the Bank of England’s Monetary Policy Committee voted in favour of raising the interest rate from 0.25 per cent to 0.5 per cent, reversing the 2016 post Brexit decrease in the rate and representing the first increase in over 10 years.

The largely unpopular decision was ultimately triggered by the Brexit referendum: an economic shock which led not only to a steep devaluation of the pound, but also a subsequent rise in CPI Inflation to the alarming rate of 3 per cent, a figure on the cusp of the Bank of England’s target rate. The higher base rate of 0.5 per cent is expected to reduce inflation by slowing down growth, which has recently been growing faster than its ‘speed limit’.

The Bank of England predicts that it is necessary to push forward with two more rises of 0.25 per cent between now and 2020, bringing the interest rate up to 1 per cent, in order to effectively stabilise growth and inflation rates. As a comparison, the interest rate before the recession peaked at 5.75 per cent in July 2007, the most recent increase before the one announced on 2 November 2017.

Despite both the Governor of the Bank of England, Mark Carney, and the Monetary Policy Committee’s justification with the aim of decreasing inflation and supporting the value of the pound, many economists are discontent with the timing of the decision as the economy is believed to currently need boosting rather than inhibiting.

In terms of households themselves, there will undoubtedly be many left disadvantaged by the rise. The higher rate will most notably increase the burden to those with variable rate mortgages or short term fixed mortgages, who will be hit by the rise sooner rather than later. In recent years there has been a growing popularity of fixed-rate mortgages, therefore the rise is believed to affect less than half of home buyers. Additionally, those in debit of other fees related to credit cards and overdrafts will also suffer from the higher repayments.

On the other hand, savers with variable rate savings accounts are due to experience higher rates of interest on their savings. This incentive, certainly being an aim of the Monetary Policy Committee in the increase, is to encourage saving and thereby reduce consumer spending, in the ambition to stabilise price levels.

Nevertheless, despite the plethora of implications, the 0.5 per cent interest rate announced is a base rate, meaning that it is not obligatory for banks to pass this new rate onto all of their customers. Many large banks are raising mortgage repayments without delay, whilst being reluctant to confirm that they will pass on the advantage to the savers holding accounts with them. As with any economic policy, it is now a matter of waiting to see if the desired results bear fruit.

Sources and Further Reading

Image: George Rex @ Flickr

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