Why have the interest rates gone up?
On Thursday 23, March 2023, The Bank of England raised the interest rate (Bank Rate) by 0.25 percentage points to 4.25%. The bank is known to increase the interest rates because inflation is too high. The Bank has raised the interest rates 11th consecutives times following a surprise jump in the rate of rising prices. Typically, the best way to bring down inflation is by raising the interest rates. This is known to affect several people who are looking to borrow money as it would result in higher borrowing costs. Some businesses will also face higher loan rates.
We know that the rise in interest rates will make things hard for many people, coming on top of higher energy and food bills. Read the following blog from an accountant's perspective to understand how these changes would affect every sector.
How high are the interest rates expected to go?
The interest rate is already known to be at the highest level for the last 14 years. This rate has been rising consistently as a response to the rising cost of living. The unexpected increase in inflation has impacted the bank rate. There is a lot of uncertainty over the coming months, but the situation is believed to come in control by the middle of the year. According to analysts, the rate is expected to reach 4.5% in summer. The next decision on the rate is to be announced on May 11.
How would the interest rates affect various sectors?
More than 1.4 million household in the Uk are facing the effects of the interest rate rises. If you have a loan or a mortgage you would be affected by the rise in interest rates. You might realize that the cost of your repayments has gone up. It is important to understand how the change in the interest rate could impacts your ability to pay. The following are the most effected sectors:
After a period of low rates of interest, many homeowners are now facing higher monthly repayments. According to the Bank of England, around four million households face higher mortgage bills this year. An estimate of 356,000 mortgage borrowers could face difficulties with repayments by July next year, according to City watchdog the Financial Conduct Authority.
The increase of the Bank rate from 4% to 4.25% would indicate that those on a typical tracker mortgage will have to pay about £24 more a month and those on standard variable rate mortgages would face a £15 jump. This is expected to come on top of increases following the previous recent rate rises. Compared to December 2021, average tracker mortgage customers will be paying about £394 more a month, and variable rate mortgage holders about £251 more.
The forecasts suggest that these rates could start to come down again in the summer, but there is a significant degree of uncertainty about the same. Around three quarters of mortgage customers hold a fixed rate mortgage. These fixed rate mortgage holders' monthly pay is not expected to change immediately. An estimate of 1.8 million people are seeking to remortgage this year, they will have to pay a lot more now than if they had taken out the same mortgage a year or more ago.
Credit Cards and Loans
The interest rates of the Bank of England are known to influence the amount charged on things such as credit cards, bank loans and car loans. Like mortgages, the repayments for credit cards will increase due to the interest on this debt rising as well. This means that the credit card owners are also expected to pay more every month on their repayments. The average annual interest rate in January was 20.85% on bank overdrafts and 19.9% on credit cards. The lenders could decide to put prices up further if they expect higher interest rates in the future.
Individual banks and building societies usually pass on interest rate rises to customers. The deals that are being offered now are better than anything that has been offered for years. The increase in the rate rises should mean that the savers get a higher return on their money, but the interest rates are not keeping up with rising prices.
This means that the value of cash savings is falling in real terms. A rate rise potentially leads to higher interest on savings accounts, but this rise is far below inflation, meaning the bank account holders would still be netting a loss. The experts recommend paying off the high- interest debt as the interest rates for borrowing are higher when compared to saving deals.
How can we help?
With the introduction of new interest rate benchmarks, the accounting standards have been amended. Financial planning has become more essential than ever before to maintain the cashflow. Our expert accountants at PKPI are here to help.