UK Interest Rates: How High Would They Rise?
After the pound’s value fell due to the government’s decision to reduce taxes and increase borrowing, the Bank of England issued an alert that interest rates could increase once more. It might have a major impact on borrowing costs and people’s budgets.
How High Could Interest Rates Go?
The Bank of England raised interest rates by 0.5 percentage points to 2.25% on 22 September, the highest level in 14 years. After the pound reached a record low value vs. the US dollar, it stated that it would “not hesitate” to raise interest rates further. According to one prediction, rates could increase to 6% in 2019. Based on the rate investors currently pay for borrowing money, that is.
The Bank’s monetary policy committee meets monthly to discuss interest rate strategy. There were rumors that it would hold an urgent meeting to discuss the issue, but the Bank said it would postpone action until the 3 November meeting. Because it wants to keep inflation at 2%, yet prices are rising at a rate approximately 5 times that, the Bank is under pressure to raise rates.
How Do Interest Rates Affect?
#1 – Mortgages
According to the government’s English Housing Survey, just under one-third of households have mortgages. About 2 million consumers with a tracker and variable rate plans immediately experience an increase in their monthly payments when interest rates rise.
Those with a typical tracker mortgage will now pay an additional £49 per month due to the recent hike to 2.25%. Mortgage holders with normal variable rates will see a £31 increase.
It follows recent rate hikes that were preceded by increases. Customers of tracker mortgages pay, on average, £216 more per month than they did before December 2021, while those with variable mortgages pay, on average, £163 more per month.
Additionally, nearly three-quarters of mortgage clients’ fixed arrangements are affected. Their monthly payments might not change, but any new transactions will be more expensive because lenders now anticipate higher rates. Anyone looking to modify their mortgage or buy a new home must pay more.
An average two-year fixed agreement that cost 2.29% in November of last year now costs 4.24%, a difference in monthly repayments for a typical borrower of hundreds of pounds. Few options are available due to certain lenders pulling offers and recalculating costs.
Also Read: Top 4 Mortgage Tips for First Time Buyers
#2 – Credit Cards and Loans:
The interest rates charged on things like credit cards, bank loans, and auto loans are also influenced by the Bank of England. Even before the most recent ruling, the average annual interest rate for bank overdrafts and credit cards in July was 19.9% and 18.57%, respectively. Lenders can raise their charges even more in expectation of rising interest rates.
#3 – Savings:
Individual banks and building societies typically communicate interest rate increases to customers. Although savers will get a larger investment return, interest rates are not keeping pace with the price increase. It suggests that, in actual terms, cash savings are losing value.
Why Does Increasing Interest Rates Help Lower Inflation?
To combat inflation, the Bank has been raising UK interest rates. As Covid restrictions have loosened and consumer spending has increased, prices are rising quickly worldwide. Many businesses struggle to acquire enough inventory to sell. Prices have increased due to too many buyers competing for few available goods. Additionally, there has been a considerable rise in oil and gas prices, which has been made worse by Russia’s invasion of Ukraine.
Raising interest rates makes borrowing money more expensive, which reduces inflation. It encourages borrowing, frugality, and increased savings. The Bank must strike a difficult balance because it does not want to impede the economy overly. The UK has seen historically low-interest rates since the global financial crisis of 2008. 0.1% was the rate last year.
Why Are People Discussing More Rate Rises Now?
Following the 23 September mini-budget, the pound experienced a significant decline. Investors are concerned about the UK government’s excessive borrowing. The decrease in the pound’s value is problematic because it raises the cost of importing everything from food to crude oil. Therefore, prices rise, and the Bank may decide it needs to raise interest rates to slow inflation.
Government tax reductions might increase inflation by giving individuals more money to spend, which would be another reason for the Bank of England to raise interest rates. Because of this, experts are currently predicting that rates will peak at over 6%.
The UK is affected by global pricing increases. Therefore, the impact of UK interest rates increase has a limit. However, interest rates are rising in other nations as they follow a similar strategy. For more information and financial services advice, contact the expert of Mountview Financial Solutions.