Interest rate rises insights

On 3 November, the Bank of England raised their benchmark interest rate to 3%, up from previous 2.25% which had been set in September. This has been the eighth consecutive hike since last December, at which point the base rate was 0.1%. With another review due to take place on 15 December, borrowers fear yet another increase. Having hit the 3% mark, the base rate is now at its highest level in the last 14 years.

Why has the Bank of England increased interest rates?

The Bank of England’s Monetary Policy Committee is responsible for taking action to influence how much money is in the economy and for controlling inflation. This is achieved primarily through increasing and decreasing the Bank Rate, which determines how much it costs high street banks to borrow from the central bank. High street banks fluctuate their own interest rates in accordance with the base rate and in consideration of other factor such as the duration of the loan and the risk of non-payment. The rates offered by high street banks directly impacts the financial decisions of all those who are borrowing, saving, and investing money.

The UK Government has set the Bank of England a target of keeping inflation at 2% – meaning that the price of goods and services, on average, should increase 2% every year. Currently, prices are rising at 11.1%. In order to urgently lower the rate of inflation, in hopes of curbing the pressing cost of living crisis, the Bank of England has steadily increased its base rate for the past 11 months. There are still concerns that inflation will continue to rise for the foreseeable future as it takes around two years for the monetary policy to have its full effect on the economy.

As interest rates increase, borrowing becomes more expensive, and saving becomes more rewarding. This should cause general spending patterns to decline allowing the price of goods and services to stabilise.

Effect on borrowing

Increasing interest rates will cause borrowing, whether in the form of a mortgage or other type of loan, to become more expensive. Individuals and companies with existing fixed rate loans will not feel the effect of the increase until their fixed period comes to an end. However, those who have loans with variable interest rates or those looking to enter into a new agreement will notice that the cost of repayments have risen sharply. With borrowing becoming increasingly unaffordable, people will be encouraged to cut expenditure and save their money.

Positive impact – effect on saving

The impact of increasing interest rates is not entirely negative. For those who turn towards saving rather than spending, the interest they receive on their savings will go up bringing them higher returns. Overall decline in spending will also cause  the cost of goods and services to rise at a slower rate, bringing down the rate of inflation and hopefully tackling the cost of living crisis.