Earlier this month, the Bank of England raised interest rates from 0.5% to 0.75%. This is not a big increase admittedly but bearing in mind the 0.5% was in existence in March 2009, and hasn’t changed at all since then, I suppose this is a big change, in a kind of a way. There are two sides to look at this from however.
From a savers point of view, the additional 0.25% won’t make any kind of serious difference unless you have millions of pounds stashed away, and even then, if you had this all in interest-bearing stock, you would be losing out anyway. When you take into account the fact that the current inflation rate is 2.5%, savers will still be losing out if they have money in a bank or building society getting only 0.75%. In real terms though, savers will still be worse off as they are not getting more than the inflation rate, but the rate increase has very slightly helped them, and we use that word loosely.
Borrowers on the other hand though will find that very shortly, lenders will increase their borrowing rates, because they in turn will have to pay more for the money that they borrow. This increase of course will be passed on. Mortgages will be dearer, and we have started to see some lenders withdrawing previous deals and re-arranging them and offering ‘new’ ones. Needless to say, they are a bit more expensive.
The reason that the Bank of England has raised interest rates is to take some heat out of the economy. We saw the effect of this, as inflation (which had been pretty steady) at 2.4% p/annum has just increased to 2.5% p/annum. Interest rates are used to albeit slowly reduce the amount of money available in the market today, and it is hoped that this reduces inflation going forward.
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