Through plain sailing and choppy waters, our economy relies on the Bank of England to set the basic interest rate to protect our commercial and personal interests.
To combat inflation and stay competitive, the BoE sets a base interest rate – the official bank rate paid on commercial bank reserves. Since 2009 that figure has been 0.5%, but only 12 months earlier it was above 5%1.
As the interest rate affects savers, spenders and retailers alike, some are keen to see the rate finally rise, while others would be happier with the way things are. It all depends on where their money lies and where it’s going.
In August, only one of the eight members of the Monetary Policy Committee voted2 to raise the figure, meaning that for now there’ll be no change.
But as analysts continue to predict a brighter financial climate for Britain, it’s only a matter of time before the committee meets again and decides whether the rate should be raised.
Considering the effects this decision will have on other British banks’ own rates of interest and incentives, with their savings accounts to fill up and property debts to drive down, what sort of effect would a future rise in interest rates have on UK households?
In 2007, one of the UK’s major supermarket chains called for a cut in interest rates3 because they were worried about the effect inflation would have on their prices. As each chain aims to be consistently competitive on price with their rivals, anything which may have forced them to raise prices may have cost them in customers instead, amplifying the effect of the loss.
These days, as the price war rages on with some big casualties including Morrison’s, who this week announced4 the closure of 11 branches and the sale of its fleet of smaller convenience stores, the range of items which are more affordably priced for customers constantly increases. And it’s not just the groceries – the likes of HMV and Waterstones try to stay competitive against online giants like Amazon, meaning friendlier prices for all your home, entertainment and tech needs. For consumers, a proposed rate hike wouldn’t mean much, provided the retailers were able to stay competitive enough to earn our custom.
But in products directly influenced by the strength of the banks, it’s an entirely different outlook depending on whether you are a borrower or a saver.
While a hike in interest rates would generally pay dividends for those with savings investments it also means higher payments on debts such as mortgages or other loans.
The Bank of England estimates5 that 44% of homeowners are on fixed-rate plans, which allow you to pay the same rate of interest to a bank for an agreed-on period of time, usually two or five years. While the base rates are this low, it’s far more affordable for homeowners to agree to a lower fixed rate, especially once rates start showing signs of improvement.
However, the other 56% of UK homeowners are on standard variable rate (SVR), or tracker mortgages, which means that the money they owe on a monthly basis depends on what the bank sets using BoE rates as a baseline.
As mentioned earlier, while mortgage providers tussle to offer as competitive a monthly repayment as they can with such a low BoE interest rate, the opposite is true of savings providers; they want to offer as high a rate of interest as possible in order to convince customers to bank with them.
In terms of adding on interest, the most appealing offers generally come with accounts that have minimum requirements for duration of saving. You shouldn’t expect banks to be too generous on earned interest if you’re able to withdraw money any time you want.
A popular option for many savers has been the Individual Savings Account, or ISA, which replaced PEPs and TESSAs in 1999. Because it’s exempt from income tax (and Capital Gains Tax in the case of Stocks & Shares), an ISA offers savers the chance to make a tax-free investment on their interest, allowing customers to retain their entire cake instead of giving it to the taxman, as the popular savers’ mantra goes. But there are limits – your personal tax-free allowance has recently increased to £15,240 but any deposits over and above that amount in a one-year period won’t be tax-free.
That said, some current accounts now offer benefits to customers that are as good as accruing interest
With the base interest rate as low as it’s ever been, savers are sadly not feeling the benefit of putting their money away for a rainy day. But for those who are struggling with monthly repayments to their mortgage provider, the timing has never been better.
The information in this article is provided for education and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness or fitness for any particular purpose. The information in this article is not intended to be and does not constitute financial or any other advice. The information in this article is general in nature and is not specific to you the user or anyone else.