The Bank of England is reportedly set to raise the base rate of interest on Thursday 4th November, taking it up from the current historically low rate of 0.1%.
The base rate is the amount of interest that the Bank of England charges other banks and lenders when they borrow money and is usually an indicator of the amount of interest that will be charged by banks in the wider economy.
The reports come with the current interest rate at 0.1%, a historic low, which has followed more than a decade of low-interest rates since the 2008 financial crisis.
The decision will be made by the Bank of England Monetary Policy Committee, which meets every 6 weeks to decide on the base rate. The committee is made up of the Governor of the Bank of England (currently this is Andrew Bailey), three Deputy Governors, the bank’s Chief Economist, and four members appointed by the UK Chancellor.
What are interest rates?
The interest rate is the amount a lender charges a borrower and is a percentage of the amount that is loaned. This means that it is essentially the cost of the loan. The higher the interest rate, the more expensive it is to borrow money, meaning that the expected rise will make it more expensive to take out loans.
Low-interest rates mean more spending money in a borrower’s pockets and that people may be willing to make larger purchases (such as mortgages) and will borrow more. This will theoretically encourage demand for household goods.
A rise in the interest rate makes it more expensive to borrow money and discourages people from spending. It is used as a tool to control inflation, which is when the price of goods and services increase.
The Bank of England is predicting that inflation could rise by as much as 5% next year, which would significantly increase the cost of everyday items that people buy. The predicted rise in interest rate is aimed at keeping the cost of living affordable.
What could the rise mean?
The predicted rise is set to take the interest rates from 0.1% to 0.25%, a seemingly small rise, but it could have a significant impact on people’s savings. One of the major impacts is that high street banks will likely raise their interest rates, which would make borrowing more expensive.
This could mean that the cost of a typical tracker mortgage customer’s monthly repayment would go up by £15.45, or almost £200 per year.
However, it will also mean that savers will earn more interest on their savings. Although this is not guaranteed, some experts project that savers could be earning more on their savings within months, if banks raise the amount of interest that savers earn on their accounts. This could have a significant impact on the wider economy, encouraging people to put more money into savings rather than investments and reduce individuals’ spending.
Traditionally, interest rates have been seen as the major tool to control inflation. If consumers are earning more interest on the money in their accounts, they are less likely to spend it. When fewer people are spending money, there is a fall in the amount of demand for goods and services, and this leads to lower prices in order to encourage people to buy.
When interest rates are low, and demand is high, businesses can afford to charge higher prices for products, with people being more willing to spend the money if they are not earning strong interest on the money that is sat in their savings accounts.