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Interest rate hike – bad and good?

PUBLISHED: 3 August 2018

The Bank of England, after long deliberations and delay, has decided to raise its base rate from 0.5% to 0.75% in its efforts to cool post-Brexit inflation and strengthen the economy. The delay was caused by a slower than expected economic growth due to severe weather conditions at the start of the year. However, the economy is bouncing back, again due to the weather conditions, but this time it is caused by heatwave.

This rise is estimated to increase variable-rate mortgage payments for around 3.5M households. Some can cope but for some it can become a real burden.

Furthermore, one would expect that the borrowers would benefit from the rise like they should generally. However, last time the base rate was increased, they were not offered any relief as it is completely up to the banks and building societies to decide whether and how much they want to increase their savings rates. This time this can be the case again.

However, while at the first glance the quarter-point rise does not look good for the mortgage owners, or borrowers, it does not look that bad for the overall economy if you think about it. First of all, it is only the second increase after the financial crisis slashed the rates to emergency low 0.25% in 2009. Besides, even with this rise, the rates are still very low compared to pre-crisis 5% and higher.

While people struggle to get their heads around this rise, Mr Carney, Governor of the Bank of England, has already warned us about further rises that he promises will be “gradual” and “limited”. But as much as they are keen on doing it, their hands are currently tied by Brexit negotiations and uncertainty over the withdrawal deal. Chances are they will have to roll back to 0.5%. For now, let’s just wait and see.

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