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BLOG: What could an interest rate rise mean for you?

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04/07/2014
The Bank of England has raised eyebrows by suggesting that the base rate could rise sooner than expected - but what would this mean for consumers?
BLOG: What could an interest rate rise mean for you?

Savers fed up of historically low growth will be breathing a sigh of relief. In theory, a rise in the Bank Rate means that people should see higher interest on their savings. However, there is always the chance that when the base rate goes up, banks won’t pass on the full increase to savers.

Remember, though, that the low base rate isn’t the only thing keeping interest on savings down; the Funding for Lending Scheme (FLS) supplied banks with about £80 billion of cheap funds to be used for lending. This pushed mortgage rates down but meant that banks didn’t need to compete for saver’s money – so they had no incentive to offer high interest rates. The bottom line: savings rates won’t shoot up overnight, but since the only way is up from here, you may want to think carefully before taking out a fixed rate savings product now.

When it comes to mortgages, a rise in the base rate will probably mean higher rates and therefore higher monthly repayments. If you’re on a variable rate and thinking of fixing, remember that the best fixed deals will probably disappear from the market before the base rate actually goes up – so it’s never too early to start looking.

Those on low variable rates may want to consider over-paying to make their lower rates work harder for now, improving their position when rates do go up. You could also carry out a “stress test” on your finances; look at your monthly income and expenditure to see how you would cope if rates rose tomorrow.

It’s hard to say exactly when rates will rise. The economy is showing signs of recovery – inflation has been below the Bank’s target of 2% since January – but there are wider economic factors which could keep rates down for a little longer.

Unattractive savings rates can lead to increased consumer spending, which the MPC may want to encourage, and the pound is currently strong against the euro – good news for holidaymakers but not for businesses, as exports become more expensive. If rates rise in the UK and fall elsewhere in Europe the pound would become even stronger, so there could be pressure on the MPC to keep rates low for now. It’s also worth noting that Carney said any increase will be “gradual and limited”.

The next meeting of the MPC will be on the 10th of July. The minutes of the last meeting indicate that opinion is divided on the committee, and not all the members agree with Carney’s view. If we don’t see a rise in the base rate soon, it could well be that the MPC intends to wait until after the 2015 general election.

Katie McMahon is financial product manager at YourWealth.co.uk.

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