First Base Rate Rise in Nearly a Decade

by Rhys Hicks

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Last Thursday saw the long-awaited first rise in the Bank of England base rate since July 2007.

With rates being increased gradually from 0.25% to 0.5%, it is also the first adjustment since the wake of the UK’s vote to leave the European Union.

Championed by some as a further sign of recovery in the economy, many people on a variable rate mortgage may be a little less exuberant.

Yet as ever, the Bank of England face a balancing act to ensure interest rates keep up with a growing economy.

Governor Mark Carney has stressed that in order to bring inflation in line to a target 2%, it was an inevitability that rates had to be raised.

Impact on mortgages

For the time-being at least, those on fixed rate mortgages will breathe a sigh of relief that they’re on some of the lowest rates they’ve ever enjoyed. Of course, there will come a time when those deals expire, and they are potentially exposed to an even higher base rate.

However, for those on standard variable rate deals, the impact will be more immediate. As highlighted by the BBC, 46% of households with a mortgage are currently on either standard variable or tracker rates, yet UK Finance project the average increase in monthly costs should at least be limited to around £12 a month.

The modest increase in costs should go some way to easing any residual fears that a hike would be anything more than 0.25%. The Bank have repeated previous sentiments that any future increases would be at “a gradual pace and to a limited extent.”

Gearing up for Christmas lending

Undoubtedly, the news will come as a welcome boost to savers who have seen their returns diminished significantly over the past decade. Borrowers on the other hand will feel slightly less enthusiastic.

Given the rise has only brought interest rates slightly up from the lowest level since the financial crisis, it’s still unclear at this point how much of an impact this hike will have on day-to-day lending. Many economists believe the potential impact will be minimal.

For lenders however, it’s perhaps an early sign that with hopes of further growth throughout 2018, further gradual rises could follow. Indeed, a justification of Thursday’s increase was to ensure consumers already constrained by a high 3% rate of inflation, aren’t further put at risk by accessing cheap credit.

Earlier in October, Carney stated the measure would help check a small but significant volume of consumer credit lenders who have “not been as disciplined as they should be in their underwriting standards.”

With Christmas on the horizon, and festive shopping already in swing, news this week of consumers willing to use credit for their purchases will have furthered these concerns. A rate increase, as small as it is, will potentially go some way to assist in maintaining more responsible lending levels.

As ever, interest rates are always a contentious issue for some, but certainly one of a whole host of economic factors on the public at large. We’ll keep you up dated should there be any further movements on interest rates.