Today (8th February) the Bank of England’s Monetary Policy Committee (MPC) held its monthly interest rate setting meeting. The vote to hold the base rate at its current level of 0.5% was unanimous and was in line with analysts’ expectations. However in a surprise announcement the Governor of the Bank of England, Mark Carney, said he expects interest rates to rise earlier and more sharply than he had previously indicated.
What has changed?
In November 2017 (when the base rate increased from 0.25% to 0.5%) the Bank of England suggested there could be two rate rises over a three year period. Now it appears they expect three rate rises over the same period and the first rise to take place sooner than they previously anticipated.
Why has this changed?
The Bank of England is now more optimistic about the UK economy than they have been previously. On top of this, they don’t like the fact that inflation has been consistently above its target rate of 2% per year for several periods in a row. A rise in interest rates takes some of the “heat” out of an economy and this should cause inflation to fall more in line with the Bank’s target rate.
Why does this matter?
As a whole, the UK has a lot of personal debt which includes store cards, credit cards, personal loans, car finance and mortgages. As a result interest rates affect a significant proportion of a typical person’s monthly outgoings. Higher interest rates will increase the amount of interest earned on savings but also cause the cost of mortgages, personal loans and credit cards to rise. Interest rates also have an indirect impact on things such as the cost of food and fuel. This is because a higher interest rate normally causes the value of the pound to strengthen and in turn this causes the cost of imported goods to fall.
What about Brexit?
Many people will be surprised to hear Carney’s positive comments about the state of our economy when we are in a period of great uncertainty due to the ongoing Brexit negotiations. He did acknowledge the issue of Brexit in his speech and said the Bank of England will monitor the effects of Brexit and any interest rate rises very closely.
Do I need to do anything now?
Yes. If you are a saver you should look out for any improvement in savings rates (sometimes banks and building societies improve their rates even before a rate change actually takes place).
If you are a borrower you should look carefully at how much of your monthly outgoings would be affected by a change in interest rates.
More specifically: if you are on a fixed rate mortgage you should not experience any change in payments initially but you should be aware that when you reach the end of your fixed rate period (typically between 2 years and 5 years after your deal started) your future mortgage rate is likely to be higher. On the other hand if you are on a “discounted rate”, a “tracker rate” or your lender’s Standard Variable Rate (SVR) it is likely your mortgage payment will change as soon as the Bank of England changes the base rate. If this applies to you there are two things you can do:
- Either consider taking out a fixed rate mortgage (so your payments will not change even if the base rate changes) or
- Prepare yourself for an increase in your payments.
You should also look at your other debts and see how much they might be affected. Many car loans and personal loans are offered on a fixed rate basis (meaning the payments won’t increase when interest rates change) but not all are.
If you want to book a free initial meeting to discuss your savings or your mortgage with one of our advisers please call 01642 477758 or visit our Contact us page.