For the first time in ten years, the Bank of England has increased the UK’s interest rate from 0.25% to 0.5%. This marks a reversal of the interest rate cut they made in August last year in the wake of the vote to leave the European Union. But what does the change mean for you?
Savers welcome increase
Savers are the biggest winners from this announcement as they’re likely to see a higher return on any savings they have. Some banks have already begun raising their own rates but others are holding off.
Mortgage rate rises
This is one area that people will be stung. An increase in interest rates will see mortgage repayment rates increase also, leaving many out of pocket. It’s thought that nearly four million households will face higher mortgage interest repayments.
Interest from savings may make up for it but in a lot of cases won’t cover what you’ll lose unless you’ve got a lot of money put away.
Annuities see bigger returns
For retirees buying an annuity, the rate rise is good news. Annuity rates follow interest rates or yields of long-dated government bonds, known as gilts. As the base rates rise, these yields do too, giving retirees better value for money.
What does is mean for businesses?
The Federation of Small Businesses (FSB) criticised the decision, saying that this could not have been more badly timed for small businesses. National chairman Mike Cherry said: “Today’s rate rise will mean yet more cost pressures for small firms as they battle spiralling prices and flagging consumer demand.”
He suggested that the rate rise could lead to businesses viewing borrowing as more risky which could “threaten investment, growth and job creation.”
He added: “For a typical micro business owner, personal and business finance are closely interlinked. If mortgage and car leasing payments start to rise that’s less money to play with when it comes to expanding the business and taking on new people.”
The response from lobbying organisation CBI was more neutral. “While it’s the first rate rise in over a decade, it is only taking the rate back to the level seen in August 2016 and at 0.5% it remains near rock bottom,” said chief economist Rain Newton-Smith.
In terms of consumer behaviour, there has already been a slump in consumer confidence and retail sales. Rising mortgage rates may add to consumer caution which could be bad news for businesses.
The pound has also suffered a dip in value, falling by more than a cent against both the dollar and the euro.
Overall reaction is split, with the change being welcomed by savers but mostly not by businesses or people with mortgages.
The TUC said: “Today’s hike is a hammer blow for those in problem debt, whose repayments will now rise. The Bank of England has made the wrong call – but the government must not hide behind it.”
However, Mark Carney defended the decision by saying it was time to “take the foot off the accelerator”. He said: “To be clear, even after today’s rate increase, monetary policy will provide significant support to jobs and activity. And the MPC continues to expect that any future increases in interest rates would be at a gradual pace and to a limited extent.”
What do you think of the Bank’s decision to increase rates? How will you be affected? Please share your thoughts.