(qlmbusinessnews.com Thurs, 21st Sept, 2023) London, UK —
Interest Rates: Impact on Your Finances in the UK.
The Bank of England has broken its streak of 14 consecutive interest rate hikes. September sees the Bank rate, determined by the Monetary Policy Committee, hold steady at 5.25%, providing a momentary reprieve for homeowners contending with rising mortgage rates. However, for savers, the era of potentially better news may be at an end.
This decision maintains the Bank rate at its highest level in 15 years. The fundamental principle here is that raising interest rates increases the cost of borrowing, resulting in reduced spending, lower demand, and ultimately curbing inflation. Since December 2021, rates had been on an upward trajectory, aligning with the Bank's efforts to bring inflation closer to its 2% target.
According to the Office for National Statistics (ONS), prices increased by 6.7% YoY in August, a slight dip from July's 6.8% and a considerable fall from the peak of 11.1% recorded in October 2022. While this remains well above the Bank's 2% target, it has influenced the decision to pause the rate hikes, with five of the nine-member committee voting in favor of this pause.
Policymakers will closely monitor the “core inflation” rate, which excludes volatile factors like food and energy. It declined from 6.9% in July to 6.2% in August.
At one stage, UK interest rates were predicted to rise above 6%. However, even if there is a future rate increase, the peak is expected to be lower than initially anticipated.
Interest rates affect consumers in various ways:
1. Mortgages: Nearly a third of households in the UK have mortgages, and changes in interest rates directly impact them. Tracker and standard variable rate (SVR) mortgage holders usually experience immediate changes in their monthly payments when rates rise or fall. Although the rate hikes have paused, those with tracker mortgages are still paying £540 more monthly than in December 2021, while SVR mortgage holders are paying £299 more per month.
2. Credit Cards and Loans: Bank of England interest rates also influence the interest charged on credit cards, bank loans, and car loans. In July, the average annual interest rate was 21.7% on bank overdrafts and 20.76% on credit cards. Personal loan rates averaged 8.61%, a slight increase from the previous month. Lenders may opt to raise prices if they anticipate higher interest rates.
3. Savings: Banks and building societies are under pressure to pass on increased interest rates to their customers. Although some competitive deals exist, many savers remain in accounts with minimal interest. The UK's financial watchdog has warned of “robust action” against banks offering unreasonably low savings rates. Despite the improved rates, they often lag behind inflation, eroding the real value of cash savings.
The rise in prices can be attributed to a range of factors, including increased global inflation following the easing of Covid restrictions and higher consumer spending. Supply chain disruptions and elevated oil and gas costs have also played a role, with the situation exacerbated by Russia's invasion of Ukraine. Rising wages within the UK have contributed to domestic inflation.
Globally, interest rates have been on the rise in recent months. Among the G7, the group of the world's seven largest advanced economies, the UK currently boasts one of the highest rates.
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