Rising rates – how interesting

If you’re young, today may be the first time you’ve ever witnessed a rise in interest rates. It’s been over ten years since the last increase. At the time of the last increase, July 2007, Gordon Brown was Prime Minister, the first iPhone had just come out and one of the biggest films of the year had just been released – the fifth Harry Potter film, the Order of the Phoenix.

So, by way of novelty effect, today’s interest rate from 0.25 per cent to 0.5 per cent may be memorable for young people.

Will the earth move? I guess for the more mature among us, the reaction will be: “Oh, please! We had real interest rates back in the day.” The rate rise in July 2007 was also a modest 0.25 per cent but it raised the rate to a much meatier 5.75 per cent.

Also putting things into perspective, today’s rate rise only takes us back to where we were in August last year, albeit a time where the UK economy was in a different place. Today inflation is at a five-year high, meaning households are more stretched as wage rises have not kept pace with rising prices.

Perhaps as a coping method to meet the shortfall of rising prices, people are using credit in increasing numbers which is a concern to the Bank of England, and so has led to today’s rise in rates.

Rising costs of imported goods, due to the fall in sterling since the Brexit referendum result last year, has also put pressure on the Bank of England to raise interest rates as a rate rise could boost the value of sterling.

As well as manufacturers potentially benefiting from today’s rate rise, it could also offer hope for the nation’s beleaguered savers who’ve suffered so long from record low interest rates. They shouldn’t hold their breath though; banks are notoriously slow to increase savings rates and any increase is unlikely to mean savings will catch up on inflation.

It’s mortgage-holders, of course, that are most likely to be negatively affected by an interest rate rise. However, today’s quarter point rate rise will only have a negligible effect – £19 a month more for those with £150,000 outstanding on their mortgage.

But we shouldn’t be lulled into a false sense of security by today’s modest rise. If credit conditions do not improve or inflation does not get back to its target 2 per cent, there could be further interest rate rises to come.

If you haven’t already done so, look to make savings in household expenditure so you’ll be better placed to finance further interest rate rises if they do come.

The information provided in this article was accurate at the time of publishing and should be read in the context of the date it was published. Views in this article are those of the author alone and do not necessarily represent the view of Scottish Friendly. No advice has been provided by Scottish Friendly. If you are in any doubt as to whether a savings or investment plan is suitable for you, you should contact a financial adviser for advice. If you do not have a financial adviser, you can get details of local financial advisers by visiting www.unbiased.co.uk. Advisers may charge for providing such advice and should confirm any cost beforehand.