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UK interest rate rises - but what does it all mean?

By Simon Penfold | Business | Published:

After almost 10 years, the cost of borrowing is going up.

For most of us the first we will notice after the interest rate hike is another £10 or £20 a month going out on the mortgage payment.

That's only if we have tracker or standard rate mortgages of course. The majority are on fixed rate deals, so they will see no impact – for the time being. They might be in for a shock when their fixed deals come to an end however.

Because this won't be the last rate hike. The Bank of England may only have shifted the base interest rate by 0.25 per cent, moving it back to where it was for nearly nine years before the Brexit vote sparked the last cut in August last year. But the move has major significance in economic terms.

The Bank of England and its Governor, Mark Carney, will be sitting back for the next few months to see what impact the latest move has on the rest of us, on how much we spend this Christmas, or whether we step back from those big decisions on buying a new car or a new home. Either way, more rate rises are expected at some point but we are talking about baby steps, a quarter per cent at a time.

The Bank of England uses interest rates to try and control inflation, which is now at three per cent and way above any pay increase most working people have seen in a while. So we are all a little bit worse off. Rising interest rates will add to that, increasing how much we pay for mortgages, credit cards and loans.

Mark Carney

And savers, who have watched their nest eggs steadily whittled away over a decade of ultra-low interest rates, won't see much benefit for a 0.25 per cent rise. The amount it would take to get their savings rates above inflation would have a huge, and unwelcome, impact on the nation's borrowers.

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So caution is the watchword.

At the Black Country's biggest building society, the West Brom, a spokesman said: "The West Brom is currently reviewing all its product rates for savers and mortgage borrowers following the decision by the Bank of England today November 2) to increase Bank Base Rate to 0.50 per cent.

“Borrowers who have tracker mortgages with the society will see their rate of interest increase in line with Bank Base Rate with effect from December 1.

“The increase has no bearing on those borrowers who have fixed rate mortgages, which accounts for the vast majority of customers we have lent to in the last five years since re-entering the market.

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“Some of our savers have accounts which track Bank Base Rate and these will increase by up to 0.25 per cent within the next seven working days.

“No further decisions have been confirmed yet regarding our other savings accounts and mortgage products. The society is also considering its Standard Variable Rate for mortgage borrowers, which at 3.99 per cent is already one of the lowest in the building society sector.”

The average house price across the Black Country boroughs of Dudley, Walsall, Sandwell and the city of Wolverhampton varies between around £140,000 and £170,000, rising over £200,000 in Staffordshire. According to the Building Societies Association (BSA), a 0.25 per cent increase on a £100,000 repayment mortgage would equal approx £13 more per month.

It's not very much, but Stuart Farquhar at the University of Wolverhampton is worried that, for many families, it won't take much to put them in serious financial trouble.

Dr Farquhar, senior lecturer in the Department of Finance, Accounting, Systems and Economics, said: "If this is a sign that interest rates are going in an upward direction then it could have potentially very serious consequences, because household debt is still going up.

"It has risen by around seven per cent in the last five years, and student debt has gone up 50 per cent, while consumer credit is up 20 per cent. My concern is the impact a rise in interest rates will have on those who are just about managing. Even a small increase could potentially be quite significant."

Stuart Farquhar

Recent figures showed the average amount of debt per person was now £8,000 – not including mortgages, he said, and around a quarter of people said they were struggling.

"Standard and Poors', the ratings agency, has said consumer debt is unsustainable," said Dr Farquhar. "Will a rise in interest rates encourage more people to cut their level of debt? Another possiblity is that people who are struggling currently might want to borrow more because wages rates are falling."

He predicts a series of small, 0.25 per cent, increases over time, particularly while the Bank of England and the rest of the financial economy waits for some kind of certainty over the impact of Brexit.

Meanwhile, Bank of England Governor Mark Carney has justified the rate rise, saying: "This is part of ensuring that it (the income squeeze) doesn't come back and ensuring that inflation comes back to the two per cent target in a sustainable manner."

When asked at the press conference if this was the start of a rate rise cycle, Mr Carney said the forecasts show that two more rises are needed to return inflation to target.

He added that savers were expected to benefit from the rate rise.

He said: "Banks did pass on the cut to their depositors and we expect competition to push it in the opposite direction.

"We'll watch it closely."

Simon Penfold

By Simon Penfold
Business Editor - @SPenfold_star

Business Editor based at the Express & Star's head office in Wolverhampton, looking for stories big & small.

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