We have probably forgotten how exceptional the low interest rate period from 2009 to 2021 was. The Bank of England chart below brings it home.

Before the 2008 financial crisis, interest rates were around 5% which was needed to control inflation at the time. You all will all remember the crazy house price surge in the previous five years. The rate was then cut to nearly zero to stimulate the damaged economy.

Now the Bank of England, along with other central banks, is rapidly pushing the rates up again, currently 3% and (my guess) probably peaking at 5%, the same as in 2006-2008. The conundrum is, if they are trying to control inflation, surely higher mortgage payments will add fuel to the fire?

The bank is acutely aware of this and point out that only one in three households in the UK have mortgages whereas everyone is affected by inflation. A bit of wealth re-distribution going on there!

Cont…

Moreover, the Bank of England’s strategy involves a delicate balance. While higher interest rates can curb inflation by reducing consumer spending and slowing down borrowing, they also risk increasing the financial strain on mortgage holders. This could lead to decreased disposable income, affecting overall economic growth.

The broader impact on savings and investments should not be overlooked. Higher interest rates can benefit savers through better returns on deposits, potentially leading to more savings and less spending.

For businesses, rising interest rates can mean higher borrowing costs, affecting expansion plans and operational costs. Companies may need to reassess their financial strategies to adapt to this changing economic landscape.

In essence, the Bank of England’s approach aims to temper inflation while considering the varied impacts on different economic sectors. As we navigate this period, staying informed and adaptable is crucial for both individuals and businesses.

For more information email Ray Baxter at [email protected]