Bank of England Base Rate Increase
The Bank of England Monetary Policy Committee last week increased base rate for the first time since 2007.
Although seen as a negative by many through the media and in business I’ve tried to keep a balanced view of the decision and the circumstances around it.
The big picture is that the Bank Of England are seeing an overall improvement in the economy and that inflation is now showing strong growth, which needs to be controlled for the bank to keep within their mandate of inflation being around 2% per annum.
This strengthening of growth within the economy and the fact that inflation has been over target for most of this year effectively forced Bank Of England to raise interest rates.
Bank of England Base Rate has risen from 0.25-0.5%, the first rise in the Bank Of England base rate since 2007. The increase in the rate is designed for the MPC (Monetary Policy Committee) is to try and get inflation back down to their target rate of 2%, it is currently 2.9%.
Borrowers are likely to see the biggest impact, rather than savers and this is because the cost of finance will get more expensive because of the increase in rate, but not massively so.
The increase may mean lenders are going to face increased competition because margins are going to be tighter, although the potential for this increased competition is unlikely as a rate rise of 0.25% is minimal. The effect of the interest rate on savers is, that they will see a marginal improvement on their returns for the same reason, but again not a massive change which would change .
Usually a rate rise is associated with an increase in the pound, this is not the case and the Pound fell against the Euro and the Dollar after the announcement. The reason for this is because the rates now look likely to rise more slowly in the future than has been previously estimated
Check the impact of the base rate increase on your mortgage
4.4 million households have a fixed-rate mortgage, if you are in this category then there will be no extra cost currently, there are 3.7 million households on a variable-rate or tracker mortgage and these borrowers will see their repayments rise. If you are the average homebuyer in the UK you will typically have a mortgage of £175,000, using one of the most popular deals on the market (Nationwide’s base mortgage rate tracker) the increase to your mortgage would be just £22 per month. The rates would rise from 2.25% to 2.5% meaning payment would increase from £763 to £785 per month (The Guardian).
Another consequence of the rate rise may be that consumers are offered an increased incentive to save rather than borrow and spend. As this is such a small rise it is unlikely to have a dramatic impact although, it will make some difference to some people’s discretionary spend which will reduce spend on non-essential services and goods.
Having a credit card will become more expensive and will therefore prompt customers to move hardcore debt to more manageable alternative types, the rate rise also offers an increased incentive to save meaning people are less likely to spend. The rate rise may decrease discretionary spend, if this is the case it could hit the lower end of the licensed trade such as, wet led pubs rather than food led and destination pubs which are used for special occasions (even if that occasion is that it’s the weekend).
The rate rise means the inflation level will be lower, which will slow the increase in price of goods and therefore means there may be less pressure on profit margins. The rate has risen because the MPC has seen strengths in the economy which is seen as a positive whereas, a threat of the increased rate is that many people have not had pay-rises keeping up with the inflation rate and the increased borrowing costs could well reduce the disposable income that they have.