Interest rate increase explained
Tue 14 Aug 2018
So why have interest rates increased?
On 2 August, the Bank of England, led by Mark Carney, increased the Bank Rate by 0.25% to 0.75%. Small in size, this marks a step change in the market after nine years of incredibly low interest rates and follows on from last November’s rise from 0.25% to 0.5%. So now we have reached this point, which financial commentators had been expecting, what should you make of it?
According to the BBC1, it would appear that the economy isn’t growing very fast but what does that mean?
- Unemployment is at 4.2% - a 43 year low. More economic growth would lead to increased competition for the existing workforce meaning employers would have to offer higher wages. The Bank of England are keen to keep wage inflation under control
- Higher wages increases demand for goods and services and pushes prices up. The Bank of England’s number one job is to keep annual increases in the cost of living at or near 2% - a target set by the government. It remains above that target at 2.4%
- For the first time in 30 years we are spending more than we are earning so keeping up our lifestyles by borrowing or depleting our savings
So what does that mean for you?
With interest rates rising, the Bank of England is aiming to get us saving more and borrowing less. But what are the facts?
Five interest rate facts2
- More than 3.5 million residential mortgages are on a variable or tracker rate
- The average standard variable rate mortgage is 4.72%
- On a £150,000 variable mortgage, a rate rise of 0.25% is likely to increase the annual cost by £224
- A base rate rise does not guarantee the equivalent increase in interest paid to savers
- No easy access savings account at a major High Street bank pays interest of more than 0.5%
How are Police Mutual Members and customers affected?
In general terms our members and customers are as sensitive to interest rate changes as the overall British public due to the fact that they have mortgages and saving accounts which may be directly affected by this rate increase.
For savers with cash deposits, whilst there is a question as to when and to what degree this rate rise will flow through to increased interest on their accounts, this can only be good news, whether immediately, or as a basis for account rate rises in the future.
Those who have savings and investments in the Police Mutual Life Fund will see little impact from the interest rate change. Our Fund invests in a mixture of company shares, bonds, property and cash. The investment markets had widely anticipated the interest rate rise so did not move as a result of the recent announcement.
For those with mortgages, particularly if they are on a standard variable rate (SVR) or a product that is directly linked to interest rates such as a ‘Tracker’ mortgage, then the likelihood is they will see a rise in their mortgage payments. It is suggested that members check their mortgage product and if they are on a product with a variable rate of interest or have a fixed rate coming to an end, then they contact our mortgage team to see if there is a better deal that suits their circumstances.
Why not head over to our online mortgage section and find out how we may be able to help you. Our advice is free, impartial and we search the whole market for you.
Although interest rate changes can have an effect on pensions, particularly via annuity rate changes, our Members are generally less impacted in this area due to the fact they benefit from a public sector defined benefit scheme and, therefore, unless they have additional private schemes, would not really need to concern themselves about this aspect.
1 Simon Jack – BBC https://www.bbc.co.uk/news/business-45037773
2 BBC News, 2nd August,2018
Type of article: Articles
Category: Saving my money
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