What the interest rate rise means for savers and borrowers

05 November, 2017, 02:20 | Author: Franklin Nunez

BoE Deputy Governor Ben Broadbent said on Friday that the Bank's signal that it may need to raise interest rates two more times was "not a promise", responding to a question about the BoE's previous attempts to signal the likely path for interest rates.

Monthly data on Britain's dominant services industry, expected at 0930 GMT on Friday, may provide more clues about the health of the economy and the outlook for further hikes.

In addition to the uncertainties that still remain over Brexit, the rate hike can be seen as part of a wider global monetary policy that will likely negatively affect the strong returns United Kingdom real estate has experienced in the last few years.

The panel which sets interest rates, called the Monetary Policy Committee (MPC), justified the rate increase by pointing to record-low unemployment, rising inflation and stronger global economic growth. That's more than markets are now expecting and more than the institute forecast in August.

A number of banks and building societies have already announced they will be increasing their rates in line with the rise announced by the Bank of England today.

"Market uncertainty has impacted both the residential and commercial development pipeline in London and the South East, which have been stuck in limbo since last year's European Union referendum, and if this measure can bring down inflation, particularly in construction costs, this is good news". 'Over the last year, two thirds of first time buyers have opted to fix their rate for up to two years, with a further one in four opting to fix for two to five years, ' she said.

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Borrowers tend to spend more of any extra money they have than lenders, so the net effect of lower interest rates through this cash-flow channel is to encourage higher spending in aggregate.

"The reason why we've got additional rate increases in our forecast this time is because of the lower productivity profile", Amit Kara, head of United Kingdom macroeconomic forecasting at Niesr, told reporters.

People with variable rate mortgages will be hit by the hike, with around one in 10 households now using this mortgage type.

'Those on fixed rate deals are safe for the time being but when the term comes to an end new fixed deals could be more expensive.

But not everyone expects the rise to be the start of a stream of increases.

The former Tory MP and cabinet minister said the Bank of England was "itching" to raise interest rates but warned it was the wrong decision.

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'What it does is reverse the post-referendum cut from 15 months ago, which, with activity broadly holding up, may have been an unnecessary safety net, ' he added.

The main losers will be households with a variable rate mortgage. He explained that an increase of 0.25% on a £150,000 standard variable mortgage at 4.5% over 25 years would see payments rise by more than £20 per month. Nonetheless borrowers can make big savings over SVR and also protect against any future rate rises.

"In addition, the MPC faces a long-term challenge of raising interest rates back to some sort of normal level after an exceptional and unprecedented decade of low rates since the financial crisis".

However, inflation has been running higher than that since February, and in September it hit 3% - the highest rate since April 2012.

'There is without doubt some symbolism around this first increase for 10 years but it is highly unlikely to cause the property market to implode. Arguably the real challenge comes not with the first rate rise we have now had but the one after that, ' he added.

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