Interest Rates Rise To 5% – The Impact & How We Can Help

Last month the Bank of England decided on an interest rates rise to 5%. This is the 13th consecutive occurrence of an interest rate rise, increasing by 0.5% from 4.5% previously. With the expected news coming to fruition, homeowners and borrowers collectively felt another sense of doom and anxiety.

By late 2026, the Bank of England has also claimed mortgage payments will rise by at least £500 a month. This is expected to affect nearly one million households. Due to the cost-of-living crisis, the move is part of a continuous effort to curb soaring prices and control inflation. Inflation has recently dipped slightly to 7.9%, down from 8.7% the previous month. Despite the surprise drop, it’s worth noting whilst inflation is falling it does not mean prices are falling. It just means that they are rising less quickly.

We examine the economic effects that interest rate rises will have on the public, whether they will drop anytime soon, and how Nordens’ advisors can help you during the economic uncertainty.

Why Have Interest Rates Risen Again?

The theory behind the increase suggests that when interest rates are raised, borrowing money becomes more expensive. This, in turn, reduces the amount of money people have available to spend. As a result, the demand for goods and services decreases. This leads to a slowdown in the rate at which prices rise.

Since December 2021, there has been a series of Bank of England rate increases aimed at controlling inflation. Inflation measures the general increase in prices. The target inflation rate set by policymakers is 2%. However, the impact of these rate increases has been limited so far. It takes time for the effects of such measures to manifest fully in the economy. It is likely that more time will be needed for the desired outcomes to materialise. At the next Bank’s committee on 3rd August, it’s widely expected interest rates will rise to 5.25%.

The Institute for Fiscal Studies believes rising interest rates could mean 1.4 million mortgage holders see their disposable incomes drop by more than 20%. According to the recently published Financial Stability Report by the Bank of England, an impending shift in the mortgage market is poised to impact numerous households.

As fixed-rate mortgage agreements reach their expiry and individuals proceed to renew their loans, a notable consequence will be the increase in mortgage repayments. Furthermore, rises in rents for commercial properties as a result of mortgage repayment increases, will naturally have repercussions for businesses. This will inevitably lead to outgoing costs going up, unless a fixed-rate mortgage is in place. This is why growth and profitability are paramount and why more than ever, it is so important to stay close to your numbers. It’s imperative to conduct serious cashflow forecasting and scenario planning to avoid any difficulties. Our Strategic division can help conduct these in-depth cashflow forecasts, and scenario plans. We will also hold accountability sessions to check on your progress to maximise your chances of success.

Will Interest Rates Come Down Soon?

In short, no this is very unlikely. The Bank’s interest rate is currently at its highest level in 15 years. However, it is anticipated that the rate will rise further. Bank governor Andrew Bailey has emphasised the need for additional rate hikes if prices continue to surge rapidly. Financial market experts and analysts project a peak rate of approximately 6% early next year.

Since December 2021, there have been several Bank rate increases implemented to tackle inflation. This signifies the upward trajectory of prices. However, the impact of rate increases have been limited so far and are expected to take time to fully manifest. According to the Office for National Statistics (ONS), prices rose by 8.7% in the year leading up to May. This was maintaining the same level as the previous month but down from the peak of 11.1%. Despite inflation being its lowest in over a year at 7.9%, analysts at Capital Economics predict rates will rise slightly higher due to the persistence of inflation pressures, peaking at 5.5%.

There’s no way of knowing when the rates will begin to drop. For the foreseeable future however, it seems the UK is stuck with large-scale rises in borrowing. This naturally has an impact on businesses’ expenditure of all shapes and sizes. There’s an expected increase in directors and shareholders attempting to take out money from the business in order to sustain interest rate rises. Fortunately, this is something we are experienced and adept in at Nordens. Our accountants and advisors will work with you to determine exactly what you want to get out of your business. We’ll set the wheels in motion for your desired outcome in the most tax efficient manner.

What Is The Impact On Savers?

When interest rates rise, it is common for individual banks and building societies to transmit those increases to customers. Presently, the financial landscape offers some promising prospects, as saving deals from banks available today surpass anything witnessed in recent years.

Financial analysts advise individuals and businesses to actively explore alternative options in search of more favourable savings rates. This is especially so considering that many accounts currently provide poor or negligible interest returns. In response to public and political pressure, major banks have faced demands from MPs to pass on these rate rises to their customers.

However, it is essential to note that while savers may enjoy higher returns on their investments, interest rates are not keeping pace with the escalating prices of goods and services. Consequently, the real value or purchasing power of cash savings is diminishing over time. This situation emphasises the significance of considering other investment avenues and strategies to preserve and potentially enhance one’s wealth in the face of eroding inflation.

How We Can Help?

At Nordens, we understand the challenges and difficulties, especially when it comes to finances. Bank of England interest rates also influence the amount charged on things such as credit cards, bank loans and car loans. Even ahead of this decision, the average annual interest rate in April was 21.86% on bank overdrafts and 20.13% on credit cards.

Lenders could potentially decide to put prices up further if they expect higher interest rates in the future. Fortunately, our expert and credited team of advisors have access to the highest-quality lenders on the market. Our lenders will help shape the financing and terms you require into a tailored made product just for you. What’s more, through in-depth cashflow forecasting, scenario planning, and accountability calls, our Strategic Advisory department will help prepare for the effects of interest rate rises as well as rises in supplier costs. Everything is calculated and processed down to the final digit with us, ensuring your finances are safe and the success rate of your business is increased.

If you require some assistance regarding your budgeting, cash flow, or planning in your business, or want to find out exactly what our advisory services offer, then get in touch with our Advisory division today for a FREE consultation. We hope this has outlined to you why interest rates have risen, and how we can help. If you’d like to know any further information, or anything accounting-related, please do not hesitate to get in contact with us at Nordens, where one of our trusted advisors would be happy to talk you through your query.