Interest Rates Rise for First Time in 10 Years
If you haven’t heard today, mortgage interest rates have gone up from 0.25% to 0.5%. The move reverses the cut in August of last year – made in the wake of the vote to leave the European Union. Within an hour of the announcement of the rate rise, the pound was down 1 per cent against the dollar and 1.3 per cent against the euro.
For the first time in more than 10 years, the Bank of England has raised interest rates. It’s been a whole decade since the last occasion the Bank of England raised interest rates back in July 2007. At that time, Sir Mervyn King was in charge of the Bank of England. A certain Barack Obama had only recently announced he would run to be US president. And can you remember Gordon Brown had replaced Tony Blair at 10 Downing Street? How times have changed.
So what are the effects of an interest rise?
The rise in base rates will produce both winners and losers.
Across the UK, 9.2 million households have a mortgage. Of these, around 50% are on a standard variable rate or a tracker rate. Around four million households face higher mortgage interest payments immediately after today’s rise.
How much will my mortgage go up?
Based on the average homebuyer with the typical mortgage in Britain of £175,000 your mortgage will go up by approximately £22 a month. Borrowers on a typical base mortgage rate tracker will see their monthly repayment increase from £763 to £785.
The winners will include 45 million savers, who are likely to see a modest lift in returns from savings accounts. A number of providers have already announced they will be increasing savings rates in line with the rise. Well we say a lift but 0.25% isn’t going to be a huge increase by the stretch of the imagination. If you’re sitting on a large sum of cash then it will be an improvement but still way below achievable investment returns of 6% upwards.
Landlords on tracker or variable mortgages will see their yields reduced on their portfolio from now. An unwelcome move considering that landlords are still reeling from the removal of mortgage interest relief and the additional stamp duty tax.
So why did the Interest Rates go up?
In our opinion, increasing interest rates became almost inevitable. Back in September Mark Carney the Governor of the Bank of England stated on BBC Radio 4’s Today programme that, if economic growth kept on track, then “you could expect interest rates to increase”. Given that recent growth figures were slightly ahead of expectations, an interest rate remaining at 0.25% would have been a bit of a surprise to say the least. The economy has performed better than the Bank’s post-Brexit Referendum forecast. Economic growth is stronger and unemployment is lower. However, inflation has exceeded the target and is now at 3 per cent. Although this is better than expected, economic growth overall is still somewhat subdued compared with history.
As stated inflation stands currently at 3%. What can we attribute this to? Could it be the rapid fall in sterling following the EU referendum? In addition we’ve witnessed the rising oil prices. Previously, the Bank of England has overlooked temporary increases in inflation but not on this occasion.
This rise takes the rate back to where it was before the UK referendum, and at 0.5% is still at low levels historically. With the cost of living rising at 3% annually and bank rate at 0.5%, real (inflation-adjusted) interest rates are still negative.
The effects of the financial crisis a decade ago still weigh on the UK economy. The Bank has again warned that the Brexit process “is having a noticeable impact on the economic outlook”. Brexit uncertainty is weighing on the economy. It will mean an increased squeeze on consumers with loans and mortgages, thus nipping their spending and in turn affect the economy. It may well turn out to be a vicious cycle. Carney defended the increase in the bank rate by insisting that the Bank’s goal is simply to get inflation down towards the 2% target, while keeping unemployment low. We still do not live in normal times. For that reason, the Bank has taken care to signal that any future rate rises will be “gradual and limited”. We expect the policy rate to rise 0.25 per cent every six months until the Bank Rate reaches 2 per cent in 2021.
What are your thoughts? Do you think that the UK are due for further interest rate rises in the near future?