For only the second time in over 10 years, the Bank of England has raised interest rates in the UK. At the start of August, the Bank’s Monetary Policy Committee (MPC) raised the base rate to 0.75% a year from 0.5% – this followed an increase from 0.25% to 0.5% in November last year.
These two rises follow a period between March 2009 and August 2016 when the rate was stuck at 0.5% – at the time a record low – before falling further to 0.25%. The main reason Britain has had such low rates for so long is primarily a result of the financial crisis of 2007 and 2008, and the ensuing recession.
During the crisis, bank lending – both to businesses and consumers – practically dried up, so the Bank of England felt low rates were needed to encourage commercial banks to lend more freely.
Why are interest rates rising?
So what has changed to make these recent rate rises necessary? Speaking after the MPC announced its decision on August 2, Bank Governor Mark Carney said that improving economic conditions in the UK had caused this month’s increase. For example, low levels of unemployment are starting to drive wages upwards: by raising interest rates, the Bank is trying to stop this leading to too much extra borrowing among consumers.
Carney said that further rate rises can be expected in the months ahead if the British economy continues to perform well. However, he also pointed out that any problems caused by a no-deal Brexit, for instance, could force the Bank to cut rates again.
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How will the interest rate rise affect savers?
In theory, rising interest rates should be good news for people with money on deposit in the bank: under normal circumstances, increases in the base rate generally result in higher rates on savings accounts and cash ISAs.
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However, banks and building societies can be slow to pass on base-rate hikes to their customers – and it is also worth bearing in mind that even after the two recent increases, interest rates are still very low in historic terms. Shortly before the start of the financial crisis, for example, rates in the UK were not far short of 6% a year.
If you have money in savings, check your statement or your bank or building society’s website over the weeks ahead to see how they have reacted to the rate increase. And as ever, shop around with other account providers to see if you can get a better deal elsewhere: some organisations will pass on more of the increase than others.
What about borrowers?
If you have a mortgage
Mortgage borrowers who have tracker or variable loans are likely to see their monthly repayment increase very quickly. On a £100,000, 25-year loan, an extra 0.25% in interest will mean bills increase by less than £15 a month.
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Loans and credit cards
Other forms of credit are less likely to be directly affected by the latest base-rate rise: if you have a personal loan or a credit agreement used to buy a car, for example, the interest rate is usually fixed in advance and does not change.
However, rates on new loans may increase by a small degree.
Interest rates on credit card borrowing are generally not tied to the base rate, these rates tend to be significantly higher than on other type of debt so, as ever, it is worth trying to clear credit card balances as quickly as you can.
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