The Bank of England and the unprecedented increase in interest rates- what next?
“With a good perspective on history, we can better understand the past and present, and thus a clear vision of the future" — Carlos Slim Helu.
The Bank of England increased UK’s most significant interest rate (Bank Rate) from 0.75% to 1% in May 2022; they believe that doing this will help decrease the speed at which inflation is soaring. But this it is not a quick fix, as it will take time to see results. The current official bank rate continues to be 1% as of June 2022. They are also anticipating that the inflation rate will increase to 8% during the spring. However, rising interest rates now will ensure that inflation rate decreases back down in the next few years towards their 2% target given by the Government.
The BoE has numerous responsibilities within the financial sector, including ensuring the smooth running of central banks, building societies, credit unions, insurers, and investment firms in the UK through their Prudential Regulation Authority, which regulates and oversees their operations. They are also responsible for maintaining prices low and stable by retaining the 2% inflation target given by the Government, as low and stable inflation is beneficial to the economy. The method BoE uses to handle the inflation rate is called ‘Monetary policy’; they use this to set the primary interest rate they lend to banks and buy or sell assets.
The BoE has increased interest rates three times since December 2021; no other central bank has raised its interest rates as much as the BoE has in recent months. The increases in interest rates in May’22 is their most significant increase in 13 years. They also intend to sell a part of their 847 billion pounds ($1.1 trillion) in government bond holdings (Aldrick et al., 2022). This action from the Bank of England would mean that the UK would enter ‘uncharted territory’ (Aldrick et al., 2022) because they are the only ones out of their main-economy peers to sell government bonds since quantitative easing in 2008.
Moreover, Investors are of the perspective that the Bank of England wants to take these steps to combat the recent increase in inflation from developing into a long-standing issue.
Furthermore, the Deutsche Bank predicts that the BoE’s gilts could decrease by 300 million pounds by 2025. Whereas NatWest shared that it would take until the end of 2026 to turn around the effect of the 440 billion pounds of gilts bought during the Covid -19 pandemic.
Another culprit for the unprecedented increase in interest rates is the soaring energy and food prices, which have caused the highest rise in the cost-of-living crisis since the 1950s. In addition, the war in Ukraine has only exacerbated the issue as it has battered the UK’S cost of living with an expected decrease of £2,553 in income, half of this being because of the Ukraine invasion.
What does the increase in Base rate mean for Saving accounts?
The increase in base rate might impact every type of savings account. Typically, savers will benefit from base rate increases- though the saving rates on many accounts still leave a lot to be desired, and rates did not rise that much when BoE increased the rates in May.
Some banks will be increasing the interest rate on certain savings accounts. However, not all banks will increase interest rates as they are not obligated to raise rates. The increase in rate by the Bank of England does not mean that banks will follow suit and increase rates as this had happened before when banks did not raise interest rates, and if they decide to increase the rates, it may take some time for this to reach to customers.
How does the rise in Bank rates affect mortgages?
The rise in bank rates could affect how much you pay for your mortgage and loan depending on the type of loan or mortgage you have, for instance, if the account has a variable interest rate, you might notice that the repayments you make have increased. If your mortgage is £13,000 and the interest rate is 2.5%, the amount you repay monthly will be £583. If you are on a fixed rate agreement, there will be no change in your repayments until the fixed period ends.
However, although mortgage rates are set to increase over the coming months, as confirmed by many lenders, most key suppliers remain in limbo about the best course of action for their savings rates.
How is the FinTech IntelliSaving helping Savers leverage the rising interest on savings products?
IntelliSaving is constantly updating its interest rates in line with the Bank of England’s updating of interest rates, so rest assured that the interest rates on the website and app are up to date. The platform also allows users to compare different savings products available in the market.
The interest rates will continue to be adjusted according to the economy's performance. The bank of England has said that they may continue to increase interest rates depending on the state of the economy in the next few months. They will be keeping a close eye on the inflation rate to determine the best course of action in the next 1-2 years. The BoE reviews the economy's progress, and if they need to adjust the interest rates up or down, they do this eight times a year, which is roughly every six weeks. As mentioned previously, the BoE intend to sell part of its 847 billion pounds in government holdings. However, could the BOE, Government, and other financial organisations do more to combat the impact of high inflation, high cost of living and constant changes in interest rates by implementing new strategies that could improve the state of the economy.
IntelliSaving is a money-saving app with savers in mind. IntelliSaving was launched to facilitate the tracking of multiple saving and interest-bearing accounts by allowing users to integrate numerous accounts to the IntelliSaving platform. IntelliSaving is also home to several savings features, such as a personalised portfolio which is your financial profile that includes a summary of the account balance, withdrawals, deposits, and returns. Another feature that is not to be missed out on is the comparison feature, which allows users to compare the best savings rates across different banks and building institutes. Sometimes, the interest rates offered by your bank may not be as high as the ones available in the market
There is also a catalogue of money-savings tips articles on the IntelliSaving website, such as ‘How to choose the right savings account?’
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Inflated interest rates are like two sides of a coin, with both advantages and disadvantages. However, when it comes to savings, saving accounts are worth investing in and now is as good a time as any to do housekeeping of your savings or to start your saving journey if you are not already saving. Especially in these increasingly uncertain times because it is better to have savings than no savings regardless of whether the bank increases interest rates.