Interest Rates Increased From 0.5% to 0.75%
The long-awaited UK interest rate increase has finally been introduced by the Bank of England. It marks only the second increase in the past decade. Initially, the Bank had planned to alter rates in May, but its Monetary Policy Committee felt that the economy at that point was too fragile. It now believes, however, that the weak period at the start of the year was only a temporary dip, and hopes that economic growth will rise from 0.2% to 0.4% in the second quarter.
Governor Mark Carney suggested that further rate increases would be seen in the future, but stated that they “can be expected to rise gradually”. Financial markets are forecasting at least one more 0.25% increase by 2020, but it is highly unlikely that rates will ever return to pre-crisis levels of more than 5%.
Economic Growth
The economy has strengthened recently as a result of increased household spending, which the Bank labelled as “erratic” during the first quarter. It does not see a decrease in retail footfall or an increase in the number of store closures as a concern. It instead views them as a reflection of the public’s shift towards online retail. Overall economic growth this year is expected to reach 1.4% and it is hoped this figure will rise to 1.8% next year. Increases in wage growth are also expected, whilst unemployment is forecast to fall.
Chartered Accountants in Greater Manchester, MCC, explain what the changes mean for you.
Lenders
The rate increase will be felt most keenly by those with variable rate mortgages. The number of individuals with a mortgage in the UK currently stands at 9.1 million, of which 3.5 million are on variable or tracker rates. Monthly payments will soon begin to increase, though it is hoped that the rise will be relatively small. For those with a mortgage balance of roughly £125,000, the annual payment could increase by as much as £187.
The majority of new mortgage loans are taken out on a fixed rate basis. These rates are expected to rise, but current lenders will not feel any difference until their borrowing terms have ended.
Savers
Whilst many with savings may see the announcement as positive news, it should be remembered that after the last rate increase in November, half of savings accounts did not move. This is because high street banks had such plentiful spare funds that they did not need to introduce better rates to attract savers. A change in Bank rates will not necessarily be reflected in interest paid to savers. Any changes in savings rates which do occur will probably be of only a small fraction of the 0.25% increase. To find the best rates, savers will have to be proactive.
Retirees
If you are considering retiring and wish to buy an annuity, the rate rises may prove a blessing, since annuity rates track interest rates on Government gilts. Therefore, annuities could soon provide better value for money than at present. If gilt yields increase by 1%, there is the potential for an 8% rise in annuity rates. It should be noted, however, that annuity rate rises are a slow process.
How Chartered Accountants in Greater Manchester, MCC, Can Help
If you have any questions about the interest rate increases, Chartered Accountants in Greater Manchester, MCC, are happy to help. Call us on 0161 707 1500, email info@mccaccountants.co.uk, or complete our contact form here.
To see the Bank of England announcement, click here.
