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The Impact of the recent Interest Rate increase

December 2021

For the first time in more than three years, the Bank of England has increased interest rates to 0.25% from 0.1% following recent data and statistics that show the significant increase in prices at its fastest rate for 10 years. 

This announcement came amid concerns that the Omicron Covid variation might slow the economy by leading consumers to spend less. The rapid increase in prices has raised a lot of concerns surrounding the strong inflationary pressures that the economy is on the verge of facing. To be specific, Inflation has reached 5.1%, the highest level in 10 years and the Bank of England governor – Andrew Bailey expects it to further rise early next year. 

With all of this taken into consideration. We are going to examine the impacts of this increase and what it means for certain people within the economy. 

 

What is the impact on borrowers and savers?

In the UK, around 2 million people hold one of two types of mortgages. These are a tracker mortgage customer and a standard variable rate mortgage-holder. 

The Bank of England’s decision would add slightly over £15 to the average monthly repayment for a tracker mortgage customer and a standard variable rate mortgage holder will most likely pay roughly £10 more each month. 

Due to years of rate cuts, savers haven’t had much to celebrate about for some time and when the base rate was cut last year, banks and building societies started a new round of reductions. For these savers though, while they may enjoy the news of increased rates, researchers warn that there is no assurance that higher interest rates would result in higher returns on savings. Even if saving rates rise slightly, returns remain much lower than the rate of inflation.

 

What impact will it have on other people’s finances?

For people with private pensions, if they wish to purchase an annuity to supplement their retirement income, they might profit from the increase of the interest rates. Annuity providers invest in Government bonds, which are costly when interest rates are low because other investors want to keep them. When interest rates rise, those other investors are more likely to sell the bonds, making them cheaper. As a result, annuity companies may offer higher returns. 

 

Also, most personal loans have set interest rates, so if individuals have unsecured debt, they should continue to pay it back as arranged. The finance and leasing association does not have information on what proportion of vehicle loans and other consumer finance are variable rates, but it does state the majority of borrowing is done at a fixed interest rate.

At Aston Shaw, we’re committed to helping our clients find ways to adjust to economic changes such as interest rates. If you are not sure about what to do and how to adjust to these changes in interest rates then get in contact with us today and one of our friendly experts will be in touch.

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