Rapidly rising interest rates mean homeowners are making large increases in their monthly mortgage payments.
The UK will significantly raise the bank’s benchmark interest rate from the beginning of November 2022. What impact will this have on ordinary people’s lives and the economy? What are the implications for personal finance?
The Bank of England raised its benchmark interest rate from 2.25% to 3% on November 3, 2022, in an attempt to stem a rise in inflation.
It was the eighth consecutive rate hike since December 2021, taking UK rates to their highest level in 14 years.
It is also the largest one-off rate hike in the UK since 1989 and could have a significant impact on people’s cost of living and finances.
Can the sharp rise in interest rates in the UK teach people in the rest of the world what they can do about economic expectations and financial management?
How much can interest rates go up in the UK?
Previously, on September 22, the Bank of England raised interest rates by 0.5 percentage points to 2.25%. Analysts believe UK interest rates could hit 4.75% next year.
However, the spike was lower than expected a few weeks ago, when Liz Truss’s government was engulfed in turmoil after her mini-budget sparked bad market reactions and quickly resigned after 44 days in power.
The Bank of England is an independent institution from the government and the Bank of England’s Monetary Policy Committee meets 8 times a year to decide interest rate policy.
It is under pressure to raise interest rates as it aims to keep UK inflation at 2%, but prices in the UK are currently rising around five times that level.
Considerable uncertainty remains over the government’s economic policy, with the Chancellor of the Exchequer releasing a key statement in the fall on November 17.
How do interest rates affect the average person?
Home loan / Mortgage
According to the official Housing Survey in England, less than a third of households have a mortgage.
After a period of extremely low interest rates, many homeowners are now faced with the possibility of higher monthly repayment rates.
When interest rates rise, the roughly 1.6 million homeowners who choose the tracker and variable rates typically see their monthly payments rise immediately.
With interest rates rising from 2.25% to 3%, people on a typical variable rate mortgage (who typically pays around £ 800 per month in mortgage repayments) will pay around £ 73.50 more per month . Those with a standard variable rate mortgage will face a £ 46 increase in monthly repayments.
This is the calculation after interest rates have already been raised in recent months. Compared to before December 2021, customers with variable rate mortgages were paying an average of around £ 284 more per month and holders of variable rate mortgages were paying around £ 179 more per month.
The rise in benchmark rates also has implications for fixed rate borrowers, with around three quarters of UK mortgage customers having existing fixed rate mortgages.
Their monthly repayments to the bank may not change immediately, but with lenders now expecting higher interest rates in the future, any deal with new loan terms in the market will be more expensive. This means that new homebuyers, or anyone who refinances their mortgage, will also have to pay more.
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Interest rates affect all aspects of the economy and directly affect the lives of ordinary people.
There has also been considerable turbulence in the home loan market since the Truss government introduced its mini-budget in September, although most of the policies originally announced by the government have been abandoned.
The average two-year fixed rate on a home loan was 2.29% in November 2021 and has now jumped to 6.47%. This is a difference of hundreds of pounds per month in repayments for a typical average borrower.
Credit cards and other types of loans
The Bank of England interest rate also affects charges for things like credit cards, bank loans, and car loans.
Even before the Bank of England’s latest rate hike decision, the average annual interest rate on bank overdrafts in September was 20.83% and the average annual interest rate on credit cards was 18.96. %.
Lenders may decide to raise their prices further because they expect higher interest rates in the loan market in the future.
Individual banks and construction companies offering home equity loans or savings firms often pass rate increases to customers. The savings deals on offer now are better than anything else that has been available for years.
But while that means savers are getting higher interest yields, interest rates haven’t kept pace with rising prices.
This means that the real value of cash savings is decreasing.
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Rising interest rates have not kept pace with rising prices, which means that the real value of cash savings is decreasing.
Why does raising interest rates help reduce inflation?
As a central bank, the Bank of England raised interest rates in response to rising commodity prices, known as inflation.
Global commodity prices have risen rapidly as countries loosen COVID-19 restrictions and increase consumer spending.
Many businesses struggle to get enough merchandise to sell. As there are more and more buyers on the market and there are too few commodities, prices naturally rise.
Costs of oil and gas have also increased dramatically, a problem exacerbated by the Russian invasion of Ukraine.
Raising interest rates helps control inflation by increasing the cost of borrowing. This encourages people to borrow less, spend less and save more. However, this is a difficult balance, as the central bank does not want to slow the economy too much.
UK interest rates have been at an all-time low since the global financial crisis of 2008. The central bank’s benchmark interest rate in 2021 is only 0.1%.
Are other countries also raising interest rates?
The UK is hit by rising global prices. Therefore, the effectiveness of rate hikes in the UK is also limited.
However, other central banks are taking a similar approach and are also raising interest rates.
The US central bank has announced a steep rate hike, taking its key rate to its highest level in nearly 15 years.
Most other central banks in the world have also raised interest rates as inflation continues to cause problems in many major economies.
Analysis of the BBC Economic Affairs Editor Faisal Islam
The nine members of the Bank of England’s benchmark interest rate committee revealed how much interest rates will rise, with direct implications for many mortgages and business loans.
The market has long predicted a sharp rise in the benchmark interest rate of 0.75 percentage points. This is the largest single increase since 1989.
The Bank of England avoided the move in September, opting for a modest rate hike of half a percentage point.
A lot has happened since then, including the now infamous mini-budget, the pound falling to record lows and a record rise in government funding costs, the biggest political shift in UK economic history and a change of chancellor. and prime minister.
Markets calmed down somewhat after the September turmoil.
But the real question is how high interest rates will rise and how long they will stay high as the Bank of England tries to contain double-digit inflation.
