Opinion Piece: Interest Rates Reach Their Highest Levels in Fifteen Years – What Does This Mean for You?

This opinion pieces has been authored by Fintuity’s Growth Director – Andrew Lumley-Holmes (DipPFS, CPFA)

With the soaring cost of living, many will today be wondering why the Bank of England (BOE) has once again raised the interest rates to their highest levels for the past fifteen years.

Following a flurry of announcements from the BOE today, interest rates were raised from 4.25% to 4.5% which means a further squeeze on the costs of day to day living for many millions around the country as well as an inevitable rise in the costs of borrowing.

Whilst the UK is no longer expected to enter a recession, the economy remains driven by runaway energy costs and as such the BOE took the steps in order to try to dampen the rising levels of inflation. Well intentioned perhaps but the ramifications of such a move remain mixed.

What Does the Latest Inflation Rate Rise Mean for You?

Raising interest rates has always been a blunt tool in the BOE’s armoury, there are however a number of possible outcomes that may affect your finances. Including:

• Increased Borrowing Costs: When interest rates rise, the cost of borrowing money, such as mortgages, personal loans, and credit cards, tends to increase. This means that individuals will have to pay more in interest on their loans, resulting in higher monthly payments and potentially reducing their ability to borrow new funds.
• Reduced Disposable Income: Rising interest rates can impact disposable income as individuals have to allocate more money towards debt payments. This can lead to a decrease in available funds for discretionary spending, saving, or investments, affecting overall financial stability.
• Higher Mortgage Payments: For homeowners with adjustable-rate mortgages or those planning to buy a new home, rising interest rates can lead to higher monthly mortgage payments. This can put strain on household budgets and limit the affordability of new home purchases.
• Impact on Businesses and Job Market: Higher interest rates can affect businesses’ borrowing costs, making it more expensive for them to finance operations, expand, or invest in new projects. This could lead to a slowdown in business activity, potentially resulting in job cuts or reduced hiring, impacting the overall job market and individuals’ employment prospects.
• Impact on Savings and Investments: Rising interest rates can have both positive and negative effects on savings and investments. On the one hand, savings accounts and fixed-term deposits may offer higher interest rates, providing an opportunity for increased returns. On the other hand, the value of existing bonds and fixed-income investments may decrease as newer bonds with higher interest rates become available. Additionally, the stock market may experience volatility as investors reassess their portfolios in response to higher borrowing costs.
• Opportunities for Savers and Investors: While rising interest rates pose challenges, they can also create opportunities for savers and investors. Fixed-income investments, such as bonds and bank deposits, may offer higher yields, potentially increasing returns for those who allocate their funds into these assets. Additionally, it may be a favorable time for individuals to consider refinancing existing loans at lower fixed rates before rates rise further.
• Impact on Inflation: Rising interest rates are often implemented by central banks to control inflation. When borrowing becomes more expensive, it can help moderate inflationary pressures by reducing consumer spending and curbing demand. This can indirectly impact personal finances by affecting the purchasing power of individuals as prices rise for goods and services.
• Potential Impact on Exchange Rates: When interest rates rise, it can attract foreign investors seeking higher returns on their investments. This increased demand for a country’s currency can strengthen its exchange rate. A stronger currency can have mixed effects on personal finances, impacting the cost of imports, travel, and potentially affecting export competitiveness and job markets in industries reliant on exports.

The Importance of Financial Planning

With changing interest rates, it becomes crucial for individuals to review and adapt their financial plans. This may involve reassessing budget priorities, adjusting debt management strategies, exploring refinancing options, and considering the impact on savings and investments. Seeking professional advice or working with a financial planner can help individuals navigate the changing landscape effectively.

Fintuity are able assist you in several ways of modelling and managing your personal finances, including:

• A cutting edge Virtual Adviser with an optional complimentary IFA meeting
• An extensive library of up to date financial advice, as well as a searchable blog with hundreds of articles

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Please Note: All information, references and dates included in this article were accurate at the time of publishing.