The interest rate increase in the UK in March 2022 was by 0.25%. There are plans throughout the year and even into next year to periodically start to increase the rates. There are those that wonder how this will affect their day-to-day and whether this will affect their household budgets.
There’s always a worry when governments try to influence monetary policy nationwide. Many countries, including the UK, are doing systemic increases throughout the next several months. Even over the next few years.
There are entire government entities that it’s their sole responsibility to be able to handle these increases or decreases based on the overall market condition. They must take great care with these rate changes as they can have cascading effects on fees, savings, and lending rates.
Who manages the interest rate increase?
First, it’s important to note who is in charge of changing these rates by even a small increment. The Bank of England is the official governing body, but the Monetary Policy Committee does the research.
This committee is a set of nine independent individuals with no affiliation with extensive expertise. They also have backgrounds in economics and monetary policy. They meet on average eight times per year to discuss the current economy and if they need to adjust the rates in either direction.
The US handle their interest rates in a similar fashion. Since the two economies tie closely together, they often have similar shifts in their rates. This can be seen in the recent rate hikes which happened first in the US and then shortly after in the UK.
The economic crash of 2008 made such a massive impact on the UK economy, which cascaded from the US financial crash, that they stayed relatively low for quite some time now.
There were talks to raise them earlier, but the pandemic occurred, and economic uncertainty continued. These historically low rates were around 0.1% which was maintained as a way to make money cheaper.
Lower rates mean that obtaining funds was easier and lower cost. The intention of this was to incentivise businesses to borrow and grow. Also, for people to borrow and spend, revitalising the economy.
And grow they did. Since savings rates at banks were at all-time lows, there was less money being saved and more money being invested in every economic zone on the globe. Yet as the end of 2021 started to close, many countries known for predictable growth hit all-time inflation highs.
The Results of The Inflation Highs
Countries like the United States hit inflation rates that were nearing 7% by the end of 2021. Also, the UK Consumer Price Index hit 5.5% by the end of January. Inflation is the indicator of an economy overheating, and this seemed to come almost out of nowhere. This was especially the case with spending having a reduction during the pandemic start.
Higher inflation rates meant that companies overly inflated the price of goods. As a result, common foodstuffs saw prices skyrocketing from the year before. Also, it didn’t necessarily follow higher incomes or reduced taxes to help compensate for the increase and change in pricing. That’s why interest rates needed to increase, to start making money more expensive. Not to mention to start helping to bring back down the pricing of goods.
How will the interest rate increase affect family finances?
For those considering borrowing money, it has become a bit more expensive across all borrowing types
The first area that many will notice is that the price of homes will change. This shift will affect those with current mortgages and will see their fixed rates vary in 2022 and 2023.
These increased mortgage rates will inevitably change the mortgage pricing per month without necessarily reducing the principal payment, as the additional funds are for the higher rates.
In addition, there is a select portion with a standard variable rate or SVR. This means their rates have a direct tie into the current interest rate and will change the fastest, increasing their monthly payments.
People looking for new homes may see the actual price of homes cool off or even go down a bit since borrowing has become more expensive.
Personal Loans and Credit Cards
These types of unsecured loans will go up significantly sooner and higher than mortgages. This is because they are considered riskier than mortgages that have homes attached to them.
Not only do these shifts immediately, but they may also start to increase ahead of future interest rate increases due to their higher risk profile. So those with existing personal loans that aren’t fixed and any credit card expect to see a notice of interest rates increasing soon.
For those that rent, the cost of rent has probably already seen a significant increase due to inflation. So the rise of interest rates is there to combat inflation and help to improve the rental rates. Yet, at the same time, landlords who have mortgages to pay may pass down that burden into increased rental rates. This will offset their new costs while the inflation stabilises.
Savings Rates will go up
On the flip side, savings rates by banks should start to go up in tandem with the rate increase. Currently, the growth will go to what benefits commercial banks more which is the rate they loan funds at. Coupled with a low rate for checking and savings accounts.
That means we’ll see a slower improvement in savings accounts, but it is something to consider and watch out for. However, until inflation comes back down, which could take a few quarters, the savings will have minimal impact on how expensive the cost of goods currently is.
It won’t help bring down the prices of all things
Since we live in an interconnected world, certain items will take longer to become lower than others. Unfortunately, those are everyday items such as energy and food. Suppliers pre-purchase energy prices on an open market. That market also usually has a tie into a regional or even global market.
Due to recent conflicts, many have seen the cost of energy go up, even though money should be more expensive. In addition, power is not tied to any type of country-specific inflation or interest rate increase. Hence that will increase the squeeze on the current family finances.
When it comes to food items, it is a similar issue. Food prices have become a global commodity, and those prices have an effect on higher inflationary rates. Therefore, increasing the cost of foods, while the supplying countries are working to bring down inflation.
In Short, we will see an immediate increase in our weekly grocery shopping. The same amount of groceries that cost £80 could well increase to a point where it’s now £90. This is all due to the mix of money becoming more expensive and global supply issues we hear about daily.
For how long will this interest rate increase happen?
There needs to be a balance with rate hikes. Raise them too high, and the cost of living becomes unbearable. Raise them too low, and they’ll take exponentially longer to combat inflation.
Unfortunately, they expect the inflation rates to increase to 8% by spring 2022 in the UK, meaning the interest rate increases now are only beginning. This is a 2.5% increase from January 2022, with interest rates only increasing by 0.25% from the last significant hike after the historic low of 0.1%.
The Bank of England has mapped out a target inflation rate of 2%, and it expects to reach those goals within the next two to three years. They will achieve this target with the gradual increase of the interest rates periodically so as not to upset the economy overall and how the overall global market fares.
All of this leads back to how the global economy is working and how specific pricing isn’t in the hands of just one country anymore, but the interconnected chains of nations forming the international supply trade.
Until that settles down, through the end of the pandemic and the end of the conflict happening in Eastern Europe, many will not see relief during these two to three years.
Keep in mind that if there are no changes to these major global issues, then it won’t matter how high they will set rates since the price of goods will continue to inflate, and there will be a significant chance that stagflation will occur.
Stagflation itself is where inflation continues during recession markers, such as high prices, slow economic growth, and an increase in unemployment. Not only can this occur, but it can also occur when rates are increasing too quickly, with checking for common warning indicators.
What can be done?
At this point, patience needs to be exercised with a look at current finances and budgeting. With the approaching inflation increases come springtime, the prices of everyday goods will only go in one direction.
It already came as a surprise to many that the rates were increasing within the last few Monetary Policy Committees. Yet, they’re already predicting that the rates will continue to go up with each meeting, which means it could go up to 2% by the end of 2022.
That’s when many will start to see a significant shift in their mortgages that need to be thought of now. Also, before these inevitable hikes, you should consider refinancing mortgages and any types of loans right away.
Yet as noted earlier, savings will become more robust, and the combination of savings and budgeting will lead to a substantial nest egg to start working with when the rates calm down and head towards that 2% target.
Moreover, it needs to happen this way to avoid economic collapse or a recession. Otherwise, the alternative would be for overproduction of businesses and prices that seem beyond ludicrous for common items we buy every single day. Regardless, keep an eye on every Committee meeting to see what happens with the rates.