For the first time in ten years the MPC (Monetary Policy Committee) has voted to increase interest rates. The committee is made up of nine members, of which seven voted to increase the interest rate. The rate rose from 0.25% to 0.5% and was the first time interest rates have risen since July 2007. The goal of the MPC is to keep the inflation rate at 2%, however inflation rate has been running higher than that and in September it reached 3% – the highest rate since April 2012. By lowering interest rates the MPC hopes to slow down economic growth. They believe that growth cannot accelerate much more without causing prices to rise more quickly.
The interest rate rise will stand to benefit savers and to make borrowing more expensive. Savers will see a larger return on their money, however it will cost more to borrow money and existing loans, depending on the agreement, will increase. The amount of interest you pay is based on a yearly scale. This means that if you were to borrow £10,000 at 10% interest rate and pay it back over a year the interest you pay would amount to £1000 and the total cost to borrow that £10,000 would be £11,000. However if you were to pay it off in six months you would pay £500 interest meaning you pay back £10,500 total. The interest rate rise is set to hit variable rate mortgage holders the hardest as the interest rate they pay generally move with the official bank rate. 46% of the UK’s 8.1M mortgage holders are either on a standard variable rate or a tracker rate which is a little over 3.7M households.
By making borrowing more expensive and saving more viable spending will decrease. This includes company and consumer spending. This means that businesses are less likely to invest and less likely to take risks, this is because borrowing money to fund these risks is more expensive. This in turn slows down business growth. Consumer spending also decreases for much the same reasons. Consumer spending on “luxury” items will decrease the most as these are the items that are not essential for everyday life. A decrease in growth may seem like a bad thing, however if it also causes an increase in inflation larger than the growth rate then “actual growth” will fall.
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Sources : BBC