Sorting Out Changes to the Benchmark Interest Rate

As if your internal financial responsibilities aren’t enough to contend with, you must also stay abreast of international economic affairs. Government and banking policy, regulatory oversight, and the global economic climate all directly impact your finances, whether or not it’s apparent in daily life. Turning a blind eye to these important influences can leave you completely unprepared when conditions shift – or worse, utterly blindsided by unforeseen financial events.

Among the factors shaping your individual finances, the benchmark interest rate, controlled by the Bank of England’s Monetary Policy Committee, can have an impact on many aspects of your financial life. From tracker mortgage terms to the interest rates offered on payday loans, the bank’s base rate impacts consumers with good and bad credit alike. The Committee recently decided to raise the benchmark rate of interest from 0.50 per cent to 0.75 per cent.

BoE Meets Expectations With August Interest Rate Increase

The Bank of England’s recent move to raise the benchmark interest rate did not surprise many observers. Most analysts anticipated the BoE would make a move to boost the rate – only the second move of its kind in the decade following the global economic meltdown of 2008.
The benchmark interest rate serves as the base, upon which other interest rates are calculated. That means a rate hike ultimately makes it more expensive for consumers to borrow money. In August, the Bank raised the rate a quarter-point, rising from .5 per cent to .75 per cent. The move upward indicates BoE analysts came to the conclusion a rate hike would help stabilise the economy and hedge against growing inflation.

How Does the Benchmark Rate Impact Your Savings?

Changes to the benchmark rate ripple through the economy, potentially affecting your savings, mortgage, and investments. For several years, savers have struggled to gain decent returns on deposits, facing paltry offers from banks. The base interest rate increase will eventually trickle-down to savers, improving returns on interest-bearing deposit accounts. However, since the change involves a relatively small adjustment, of one-quarter per cent, it isn’t likely to have a major impact on the amount of interest paid to savers.

Banks have also been slow to share returns, when adjustments to the benchmark rate result in better saving conditions. Although the BoE made a similar move in November, bumping the rate upward by a quarter point, the interest rate on an easy access account grew by a paltry .07 percent, during the span from September 2017, until the present time. In fact, interest rates on instant access accounts for savers still trail the rate of inflation, which currently lingers at approximately 2.4 per cent in the UK.

Mortgage Holders Face Increased Costs

Financial markets may take time fully responding to the August rate hike, but some mortgage holders face immediate costs, associated with the BoE move. Many UK borrowers utilise variable rate or “tracker” mortgages, which bill interest charges, based upon the benchmark rate. When the rate goes up, so does the amount of interest paid on these types of mortgages.

About 40 per cent of mortgage holders in the UK currently pay on variable rate mortgages. The group represents millions of owners, who’ll quickly incur higher debt servicing costs, related to the August rate rise. It is thought many of the ultra-cheap finance options available to mortgage customers during recent years will disappear in the wake of the rate increase, trending toward higher mortgage rates in the future. Britons currently engaged in fixed finance deals will not experience higher rates on their existing loans, but when the fixed deals come to a close, new mortgages will cost borrowers more than their present finance arrangements.

Keeping up with financial trends and economic events can help you manage your money. The benchmark interest rate administered by the Bank of England’s Monetary Policy Committee is one key variable to watch. Although it hasn’t shifted much during recent years, changes to the benchmark rate can have sweeping influence on personal finance. A recent bump upwards, moving the rate to 0.75 per cent, could have a noted impact on your mortgage financing, and to a lesser extent, your savings returns.

Paul graduated in 2001 with a degree in Finance. Since then he has gone on to work for several of the UK's most well-known financial institutions.

An avid blogger and a huge football fan, Paul is here to guide you through the ins and outs of personal finance and perhaps save you some money in the process!

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