The Bank of England’s base rate currently sits at a rock-bottom 0.5%; it has been that way for more than six years thanks to the effects of the late-2000s recession. Whilst this has not been good news for savers, it has benefited thousands of borrowers.
As independent financial advisors in Lancaster, we have to consider the question: is it going to stay that way?
Officially, it’s not possible to answer that question with complete certainty until the Bank of England actually announces a rise; however, it is possible to make predictions based on certain criteria.
The most important factor is inflation; the basic aim of the Monetary Policy Committee is to try to keep inflation as close as possible to their target rate of 2%.
When demand for goods and services exceeds supply, inflation tends to rise, and when supply exceeds demand, inflation tends to fall. By adjusting the official Bank Rate, the Bank of England influences borrowing and lending rates, and thus spending in the economy. When the rate is low, as it has now been for a significant period, lower interest rates allow borrowers access to more money, encouraging higher spending to improve the national economy.
However, there is a time lag between changes in interest rates and their effect on spending and saving decisions, and even more before Bank Rate changes affect consumer prices. Therefore, any rate changes are based on a prediction of future inflation – not the current rate.
So, even though the current inflation rate is nowhere near 2%, certain trends indicate that a rate rise may be looming close on the horizon. Last week, with many commentators expecting inflation to remain static at 0%, there was significant doubt, but official figures released on Tuesday morning showed a surprise increase in the UK inflation rate to 0.1%. This may not sound like much, but it is an indication that inflationary pressures are building, and that a Bank Rate rise may be needed sooner rather than later. Many commentators are looking at either the first or second quarter of 2016 as the most likely time for this to happen.
What does this mean for you? Well, the biggest immediate impact a Bank Rate rise will have on most people is on their mortgage. If you’re locked into a fixed rate mortgage, then you won’t have an immediate impact, but at the end of the term you’ll move to your lender’s standard variable rate – which may be a shock to your wallet if the rates rise significantly during your term. On the other hand, if you’re on a tracker rate, then a rise in interest will have an immediate impact.
If you are at all concerned about your ability to afford your mortgage if rates increase, or if you wish to take the opportunity to seek out a better rate before a rate increase, it’s important to seek professional, independent mortgage advice. At Burton & Fisher, our helpful and knowledgeable advisors are on hand to help you – for more information, get in touch to make an appointment for a no-obligation consultation at either our Lancaster or Morecambe offices.