At the end of 2017, interest rates were raised for the first time in over a decade – by 0.25 percentage points to 0.5 percent. Of course, any move in rates usually has an immediate impact on household finances and higher interest rates can mean higher costs for those borrowing money.
However, it’s not all bad news and the rise in interest rates can stand to benefit some people. Here at Hatched, we thought we’d take a look at the silver lining and see how the increase in interest rates could actually be a positive step.
Benefits for Savers
Higher interest rates are good news for savers as it could mean higher returns on their savings. The base rate hasn’t risen since 2007 and as a result, savers have struggled to find a decent return. However, the rates have started to look more positive in the past year and some lenders, like Nationwide, Newcastle Building Society and Yorkshire Building Society have said that their savers would benefit directly from a rise in their base rates.
So, a positive outcome from the rise in interest rates is that it could help encourage us to save more as we’ll see a better return.
People enrolled in company pension schemes could stand to benefit too. The increase in interest rates could improve the funding position of these schemes so if you’re on the verge of retirement, higher interest rates could be good news. The same goes for those who are already retired and expected to live off the interest.
Preventing Irresponsible Borrowing
Car loans and credit card borrowing have boomed in recent months and lenders have been warned that they could be underestimating their potential losses.
With higher interest rates, borrowing using loans and credit cards will become more expensive and the associated risks could encourage people to avoid what some have called “irresponsible borrowing”.
People will perhaps think more carefully about borrowing money as a result. Those who already have loans will have less disposable income as interest payments will be higher, and although this means that levels of consumption will fall, it will help control economic growth and prevent inflation.
Strengthening the Pound
The main aim of the interest rate rise is to curb inflation, which hit a five year high of 3% in September last year. This has been a direct result of the sharp fall following last year’s Brexit vote, where the pound depreciated by over 10% against other major currencies.
It’s difficult to predict when sterling will recover thanks to this uncertainty but research by the Bank of England shows that a 1% rate rise would lower the inflation rate – but only by 1% after three years.
However, increases in interest rates do tend to support a country’s currency in the long term. They encourage individuals to save more, as well as giving foreign investors more incentives to put their money in UK banks because they’ll earn more interest.
All in all, higher interest rates can affect people differently, depending on their circumstances. For example, young people with large mortgages may end up with higher repayments, but those who are saving up for a mortgage may actually be better off and enjoy more interest. This could encourage more people to save money and prevent irresponsible borrowing.
A way that higher interest rates could benefit us all is that it could help stimulate the UK economy and strengthen the value of the pound. So, in the long term, this will be positive as it will curb inflation and protect the value of currency.