On Thursday 3rd November 2022, the Bank of England announced a further hike to interest rates within the UK. The UK interest rate is now set to 3%, up 0.75% percentage points. With the government admitting a ‘fiscal black hole’ facing the UK, it’s estimated the government are attempting to claw back upwards of £50 billion to balance the books. As interest rates increase, such things that will be gravely affected include mortgages for homeowners, repayments on credit card debt, and interest on savings accounts.
Interest rates have been rising since December 2021, a measure taken to curb inflation. The UK’s inflation rate in September 2022, as measured by the Consumer Price Index (CPI), was 10.1%. This is expected to peak at around 11% over the next month. It is then anticipated to come down to the 10% mark and further as the months progress into 2023.
We break down why the Bank of England have chosen to increase interest rates and the impact this will have on the taxpayer and the wider economy…
What Is The New UK Interest Rate Announced By The Bank of England?
The Bank of England have announced an increase of 0.75% points to the UK interest rate, taking it to 3%. This means it is the biggest hike in interest rates for over three decades. It also means the UK interest rate is now the highest it’s been in 14 years.
A base rate increase in 1979 saw rates at their highest ever level at 17%. Rates then decreased for a decade before rising to around 15% in 1991. Since then, the base rate had gradually decreased to single figures. Due to the aftermath of COVID and huge government borrowing, and the war in Ukraine, inflation remains very high. This naturally affects the cost of goods and living, with food and energy prices rising extortionately.
Simply put, interest rates affect how much money a borrower has to pay back when returning the money. A higher interest rate makes it more expensive to borrow money and therefore dissuades more people to do so. Rising interest rates consequently increase the costs of borrowing. It also makes it more probable that people will want to save money rather than spend. This means that demand in the economy is decreased, and prices should begin to lower.
The Bank of England decided upon the measure to raise interest rates to 3% due to the rise in inflation . This was largely attributed to the war in Ukraine, as well as the subsequent economic turmoil caused by the recent Mini-Budget of ex-PM Liz Truss. The Bank of England determine the interest rates using a variety of metrics. These include inflation rates, unemployment rates and UK economic growth forecasts. The strength and resilience of the UK economy over the coming months will essentially determine the future of interest rates.
What Is The Impact On The Taxpayer?
With interest rates rising, it means that more and more workers will have to spend an increased amount each month. A survey of 6,000 people on behalf of the trade union, Unite, revealed more than half of people cannot or will have difficulty paying their bills this year. The poll also suggests more than two thirds of workers have experienced a real term pay cut this year. A real time pay cut is defined as when wages rise below the rate of price inflation. Labour’s Shadow Chancellor, Rachel Reeves, stated, “Rising interest rates will mean families with already stretched budgets will be hit by higher mortgage payments. It will mean higher financing costs for businesses. The UK is prone to economic shocks due to weak growth, low productivity and underinvestment, and widening inequality.”
The rise in interest rates will of course cause damage to the housing market. This is evidenced by the average five-year mortgage rate hitting over 6% for the first time in 12 years. This means less people will be looking to get a mortgage and get on the property ladder. According to Uswitch, since July 2021, the number of mortgages approved for house purchases in the UK has been in steady decline. This is from just over 76,000 to just under 64,000 in June 2022. For those who already own a home and will have to remortgage soon, the future looks bleak. Rising mortgage costs are estimated to affect 100,000 remortgaging homeowners and first-time buyers each month.
The buy to let sector is also likely to face a huge negative impact. About 40% of landlords have a mortgage on their rental properties. Landlords will find it difficult in some areas to secure a mortgage of more than 50% or 60% of a property’s value due to the rise in interest rates.
Because of this, the Chancellor has faced a barrage of calls to address mortgage-holders and how he plans to help them. With millions affected by rising interest rates, it remains unclear whether the government will intervene with support to help mortgage owners.
We hope this has outlined to you why the Bank of England have raised interest rates again, and the impact this will have. If you’d like to know any further information on anything mentioned, or anything accounting related for that matter, please do not hesitate to get in contact with us at Nordens, where one of our trusted advisors would be happy talking you through your query.