The UK Raises Bank Interest Rate – What It Means for People’s Finances
British petrol prices rose to a record-breaking 178p per litre in June. That, alongside soaring energy costs and food prices, has aggravated the inflationary crisis for households in the country. In a feature on UK inflation, Eshe Nelson reports that consumer prices rose to 9.9% in August. The central bank has been steadily increasing interest rates to curb high inflation. Nelson highlighted how The Bank of England (BOE) raised its key rate by half a percentage to 2.25%.
This article will shed light on the factors that informed the rise in interest rates and its subsequent effects on people’s finances.
Why has the interest rate been raised?
The BOE has raised interest rates to stabilise the British economy against a recession. In the mentioned feature, Nelson explains that the BOE has forecasted the annual inflation rate to peak at 11% next month. And over the next few months, inflation is set to jump above 10%. Inflation will be retained at high levels in the future, especially as winter approaches and the energy support of households heightens.
With soaring living costs, people put more on credit and took out loans to pay daily expenses. The rise in borrowing is corroborated by interest rate increases and total fees on newly-released cards. Average rates, including card fees, were recorded at their highest between June and September this year— averaging 29.6%. Because of the accessibility and convenience of credit cards, rates may even reach 30% very soon. The prevalence of businesses utilising card payment machines has further encouraged credit card payments, leading to more credit card spending. These payment terminals are found in most food establishments and groceries and entail card users to redeem store vouchers. The accessibility and potential for rewards continue to encourage credit card usage. However, when unwisely accounted for and managed, these purchases can result in larger debts.
With the added percentage, UK citizens will encounter higher interest rates in borrowing money. That expense can force people to spend less. When consumer spending decreases, the demand for goods and services can follow suit. Although prices won’t necessarily fall, the rises can reach a plateau at the very least.
What does this mean for the everyday person’s finances?
The interest rate raise has implications for a UK citizen’s personal finances. For one, the rise will entail more burdensome mortgage payments, with many paying an additional hundred pounds each year.
In a Guardian article on the implications of the half-point increase, half of the 2.2 million citizens on a variable rate mortgage are reportedly on a tracker mortgage. This means that payments will steadily grow in the next few weeks to reflect the total base-rate rise. For reference, for a tracker previously at 3%, the interest rate would spike to 3.5%. For a £150,000 repayment mortgage with 20 years remaining, one will have to pay an extra £38 a month.
Interestingly, according to the referenced Guardian article, Rupert Jones states that roughly 6.3 million UK mortgages are on fixed-rate mortgages. As such, they’re sheltered from the recent interest rate rise. For those searching for new mortgages, however, the hike in interest rate means higher borrowing costs. For example, a mortgage holder on the end of a fixed rate deal of a £200,000 mortgage could pay an added £358 per month.
On a positive note, savers may benefit from the rate hike. This is because banks in the UK are likely to increase the interest paid on deposits for saving accounts. As Jones pointed out, the top available rate is currently 2.1% for an easy-access account. Meanwhile, a five-year fixed rate savings bond has a rate of 3.75%. Despite the boosted rates, the application can take a while before savers see that their rates have been lifted.
Certainly, the increase in the cost of borrowing manifests across different facets of an individual’s finances — and necessitates a more mindful approach to conducting their spending.