#Interest Rates in the UK have risen today from 0.25% to 0.5%, signalling the first increase in rates in 10 years. The increase has been brought in effect to help ease increasing inflation. The new rate of 0.5% is still close to the record low rates that have been in effect for a number of years in the UK and across other western markets.
What is the knock-on effect of this increase?
The first group that is likely to be impacted in the immediate future by the increased interest rates are mortgage holders. Mortgage repayments are set to increase for mortgage holders on tracker rates linked to the Bank Interest rate, there will also be increased payments for mortgage holders on variable rates.
Mortgage holders on fixed rates should not be effected, however fixed rate holders might see an increase if they are coming to the end of their fix term mortgages and switching over to a variable mortgage. The increase is not likely to make a large impact on the majority of mortgage holders with a mortgage of an outstanding balance of £100,000 with twenty years left, they will only see repayments increase by less than twenty pounds per month.
Savers should see a small increase in the rates that they are receiving on their deposit rates. It remains to be seen when the increased rates will be passed onto the savers. Individuals that are close to retirement should see a small increase in their retirement options, with annuity rates expected to increase marginally as well.
This needs to be considered with a small degree of caution. Typically financial institutions make these changes slowly over time and do not always pass on the full increases to savers on all saving accounts.
UK shares in two of the UK's largest banks, RBS and Lloyds have been impacted by the increase, seeing their share prices drop by nearly 1% as the news hit the financial markets.
What is the long-term view
Overall the interest rate increase is not expected to have a large impact on the economy. The increase in the interest rate is expected to help curb inflation in the market. The current rate of inflation is currently in excess of 3%. Inflation is expected to plateau around 3% at the end of the year.
It remains to be seen how the increase will impact a vulnerable economy that is in the midst of dealing with the ongoing Brexit negotiations. Leveling inflation rates and stabilising the economy should be a positive impact for the country as a whole. Opinions are divided whether this is only the first in a line of interest rate hikes or is only a once-off in the current economic climate.
