On 11th May 2023, the Bank of England raised the interest rate from 4.25% to 4.50%. This is its highest level in 15 years. Inflation showed a slight decline in March but did not decrease as expected by the Bank of England. It remains at the level of 10.1%. As a result, interest rates have been raised to 4.5% to contain the rising cost of living.
Rapid hikes in interest rates partially caused to poor performance of the UK. The Bank of England attempted to control the rising inflation by increasing the interest rates. Despite that Consumer Prices Index keeps increasing, and now it is 10.1%. This could be an indication that there is a high chance of increasing the interest rate further.
Plus side savers can gain since saving rates may rise too.
The International Monetary Fund (IMF) has warned that the UK has the slowest economic growth among other major countries. According to the IMF’s economic outlook, the UK economy will shrink by 0.3 percent this year and grow by 1 percent in 2024.
What is interest rate?
Interest is the amount you must pay in addition to the principal after taking a loan and the amount the bank pays you for your savings.
When interest rates fall, it benefits households and businesses, who borrow money and invest it in higher-yielding investments. Conversely, savings yield lower returns when interest rates fall.
On the other hand, when interest rates rise, borrowers are adversely affected. But it will benefit savers.
What impact on the mortgage holders?
Unfortunately, this interest increase will badly affect mortgage holders on tracker rates as they have to bear higher interest cost. If your deal is a fixed rate, then you’re on the safe side. But when your deal ends, you may pay significantly higher with the next deal.
The problem arises when you’re on a variable rate. Your interest rate will vary according to the behavior of the base rate. Your installment payment will rise immediately in line with the increase of the revised base rate stated by the Bank of England.
If your mortgage comes to an end and you wish to make it fix, you are able to do it up to six months prior.
Interest rate predictions are complicated, especially a period when financial stress is high.
Forecasts assume that interest rates may rise about 4.9% in September and, after that, start to come down slowly. Looking back, this is the 12 consecutive price increase, and the Bank of England is trying to cover the price pressure.
The Bank of England is looking forward to raising borrowing costs and discouraging demand from the economy as policymakers have so far been unable to find a satisfactory solution to the rise in energy costs, which is the main contributor to the inflation issue. The Bank of England is expecting that with interest rates increasing sharply, a decrease in prices of agricultural products, and energy prices are hoping to come down; as a result, inflation will expect to fall sharply for the rest of the year.
