Bank of England raises borrowing costs to a 15-year high
Like the previous 10-year high wasn’t enough, the Bank of England has again raised interest rates, now to a new 15-year high. On August 3rd the base rate was raised by a quarter percentage point putting the country at 5.25%, the highest rate in the UK since 2008.
The bank also warned that rates were likely to stay high for some time, implying that significant rate reductions will likely be some time off.
Why are interest rates rising?
The reason for continued interest rate rises is, in short, to try and tackle high inflation in the UK. This has been caused by several factors such as residual lockdown costs, trade issues following England’s lengthy move from the European Union during Brexit, the ongoing war in Ukraine causing supply issues, and the effects of financial unrest following Liz Truss’ financial mini-budget last year, which did little to fan the flames of financial uncertainty in the UK.
These factors all converged to cause significant inflation in the UK economy, causing the price of commerce and stock to increase. Last year inflation hit a 41-year high of 11.1%, and although that rate has been gradually coming down, it’s been at a significantly slower rate than other countries.
When significant inflation begins to rise in the economy, the Bank of England will look to increase the interest rate. This works to bring inflation back down by discouraging people from spending, as when people spend less, inflation decreases.
This is a very brief, simplified overview of the current situation and there are a lot of small moving parts that go into the what’s and why’s of the current financial situation.
So, will rates continue to rise?
For the foreseeable future, it looks like the interest rate isn’t interested in coming down quite yet. Though the rate of inflation has been decreasing, with the rate dropping to 7.9% in June from 8.7%, this is still four times higher than the bank of England’s 2.0% target.
While there are no guarantees, experts predict the bank will likely raise the rate again in September as it continues to aim for its 2% target.
Will interest rates start to go down soon?
There is some good news: after September, it’s expected that the Bank of England will pause rate rises as it assesses how the previous rate rises have affected the economy. Interest rate rises have a delayed effect as they take action, so the Bank of England will look to review how inflation is progressing. The central bank forecasts the rate of inflation to drop to 4.9% by the end of the year, though the fabled 2% isn’t expected until at least 2025.
What does rising interest rates mean for me?
While it’s hard for us to know exactly how the rate rises will affect you in particular, what rising interest rates mean is that lending becomes more expensive. This means that financing options, loans, mortgages, car finance, bank loans, etc. will all come with higher repayments and costs over time.
In theory, what this should do is incentivise people to save their money and limit spending rather than taking out credit or spending excessively. However, this usually doesn’t factor in that most spending related to inflation can be due to essentials and rising cost of living-related expenses – things that people can’t cut down on.
Will my existing debts and repayments be affected by the rising interest rates?
A common question that gets asked when interest rates go up is, “How will it affect my debt repayments?”. This depends on the type of repayment option you currently have in place. Typically, a debt repayment plan is handled in two ways: fixed-rate debt and variable-rate debt.
Fixed-rate debt: If you entered into your debt repayments with a fixed annual percentage rate (APR) set before interest rates started to rise, then your repayments will remain the same and your debt should not be affected by interest rate changes.
Though you should keep in mind that if your fixed rate is set to end soon, or during times of high interest, you will likely be switched to a higher rate.
Variable rate debt: A variable rate is subject to any changes to the current market, meaning that when interest rates go down you pay less but, of course, if rates go up you can expect to pay more in interest as a result. A variable rate offers a bit of a gamble, if rates begin to lower after taking out your loan you’ll pay less in interest than what a fixed rate could offer at the time, however, if the market goes in the opposite direction you’ll end up worse off.
Often the choice of a fixed or variable rate won’t be available and your debt repayments will ultimately be up to whatever your loan provider offers. If you are unsure of which type of repayment plan you currently have, it’s important to review your paperwork (or online account) to find out the details of your loan.
What do I do if I can’t afford my current repayments?
Debt repayments can be stressful enough but finding out that you could potentially be looking at debt payments significantly higher than expected can push household budgets to the edge.
Luckily, if you are struggling with unaffordable debts, there are lots of options to help.
These include:
Revise your budget: If your bills are becoming unaffordable, the first step is to revise your budget. Though it might seem obvious, it’s important to see if some changes to your budget can improve your finances before taking more serious action. Taking a full and in-depth look at your finances can help you identify any areas that could help improve your budget and help revert money towards your debts. If you are struggling to manage your budget independently, a regulated debt advisor can help you to see where you can make cutbacks.
Talk to your loan provider about alternatives: Lenders are required to treat customers fairly and with due consideration for their current financial situation.
What does this mean in practice?
Well, being upfront about your current financial situation and showing a willingness to repay any outstanding amounts to your creditors will likely make them more open to a repayment plan or alternative payment options that allow you to repay at a reduced rate, or over a longer period to spread out costs.
If current rates or expenses have made current payments unaffordable, working out a new payment plan with your creditor may be the best option for you.
Loan Payments Holidays: Under particular circumstances or during times of economic uncertainty, loan providers may offer payment holidays to provide temporary relief for borrowers facing financial hardship. This gives certain borrowers a break from their loan payments to recover financially long enough to be able to repay consistently in the future. Not all providers have these options available, so you will need to check if your lender has this option before considering this as viable for you.
Speak to a debt advisor: Most importantly, if you feel like you need professional support, speaking to an authorised debt advisor is the best step for helping you take control of your debts. By speaking to a debt advisor you can get a detailed breakdown of your budget, allowing an advisor to asses your current finances and consider the best options for you.
If it is decided that a debt solution is the right option for you, a debt advisor can help you to choose the right solution for you and your circumstances.
