The Bank of England has recently raised the base rate from 0.5% to 0.75%, just the second rise in a decade! At present, interest rates stand at their highest since 2009 and reflect what the Bank of England perceive as a general upturn in the economy.
The Bank said that a rise in household spending has strengthened the British economy. Economic growth for the year is forecast to be 1.4% this year and the unemployment rate is predicted to fall further below 4.2%, where it presently stands.
How does the rise affect you?
When the base rate rises, so do savings rates, in principal! But it rests on the extent to which banks and building societies want to increase their deposit rates.
When in November 2017 the Bank of England raised the base rate from 0.25% to 0.50%, banks and building societies were slow to pass on any rise to savers, or they generally passed on just a small part of the full rise. Indeed, half of all savings account rates did not increase at all after November’s rate rise.
If you are on a variable rate ‘tracker’ mortgage, your repayments will rise. For example, if you have a £100,000 mortgage, this will increase your monthly repayments by £12.
It’s important to emphasise that if you’re on a fixed rate mortgage, your payments will remain the same until your promotional rate ends.
For soon-to-be borrowers, the interest rate rise points to a change in the Bank of England’s attitude. Further rate rises are a definite possibility. However, the Bank’s governor took a somewhat cautious tone which suggests that there are unlikely to be any more rises until 2019.
Sadly for those of you going on holiday, following the announcement the pound fell by 0.9% against the dollar. This is due to the great political uncertainty surrounding Brexit.
Rate rises are typically good for retirees purchasing an annuity—a financial product that provides an income for life.
Annuity rates follow the yields on long-dated government bonds, or gilts. These yields might be expected to rise at the same time as rising interest rates, providing pensioners better value for money when they purchase an annuity.
Responses from UK businesses have been mixed. The British Chamber of Commerce labelled the decision as ‘ill-judged’ at an uncertain time, while the Institute of Directors, which represents about 30,000 members in the UK, has said, ‘the Bank has jumped the gun’.
This downbeat viewpoint wasn’t unanimous among all lobbying groups. The Confederation of British Industry, the country’s largest business lobby, greeted the rise saying the case for higher rates had been building.
A minor rise of 0.25% is unlikely to have a huge impact on your finances. However, bigger increases in future may have a considerable effect on your financial situation, and the British financial landscape, overall.
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