It has been 40 days since the Bank of England (BoE) raised the benchmark interest rate to 0.75 per cent. Miles Eakers, chief financial analyst at Centtrip, has reviewed the impact of the rise on both individuals and companies.
Did the BoE achieve what it set out to do?
Rate increase explained
The UK’s central bank has a price stability mandate to keep inflation as close to 2 per cent as possible. Following the Brexit referendum Sterling slumped, this means goods and service coming into the UK have become more expensive. Which in turn means a higher inflation rate.
However, a weaker Pound is not the only cause of inflation. Higher real wages over the past couple of years have meant consumers have had more disposable income to spend. In return, higher spending has pushed up prices – a perfect scenario for inflation and the reason why the BoE increased its benchmark interest rate to prevent inflation from rising above its target.
Whether you are an individual or company, if you are a net borrower you should read on.
Now that the cost of borrowing is at 0.75 per cent, UK consumers will feel the pinch of a higher interest rates. Mortgages and other loans are linked to the BoE’s base rate. If it increases so do the monthly repayments on these loans.
Although some home owners have secured a fixed-rate mortgage and may not feel the impact for now, next time they come to re-mortgaging their monthly payments may be higher.
UK businesses that are net borrowers will also suffer.
In addition to increased monthly debt re-payments, companies that rely on consumers for revenue are likely to be affected as individuals are highly likely to spend less.
Meanwhile, net savers should benefit from higher interest rates as it means more revenue on your savings. But, a rate rise does not necessarily mean that banks will increase the interest it pays on your savings. The majority of high-street banks did not raise their interest rates automatically and may take their time to introduce higher rates on savings.
Low and slow
In the aftermath, the BoE has suggested that at least one more hike was likely before the end of 2019 – a clear sign that the UK central bank is tightening monetary policy. However, BoE Governor Mark Carney assured investors that further interest rate rises would be slow and gradual. Something the Monetary Policy Committee’s meeting this Thursday, 13 September will, hopefully, shed more light on.