THE BANK OF ENGLAND has today put up interest rates for the first time in ten years. It’s a tiny increase – from just 0.25% to 0.5%, but it is still likely to have an impact on the fate and fortunes of people across East London.
A rise in interest rates is a small piece of good news for people who rely on the income from savings to boost their pension income. Although the interest rate has doubled, it is still not high – so you would need megabucks in savings before the increase made a noticeable difference.
On the other hand, the rise is bad news for anyone with a loan – whether that’s a debt built up on a credit card, a mortgage, or a business investment. This is where three risky bits come in.
•The Government’s strategy for improving the UK economy largely amounts to getting UK-based consumers to buy more stuff that’s been made in the UK. The interest rate rise means that these consumers are more likely to tighten their belts and reduce their spending – jeopardising any notion that domestic demand can fuel a recovery. This will be balanced by the pensioners who see a tiny increase in their income from their savings and may need to spend it, boosting demand.
Homeowners are going to find that their mortgage repayments will now increase. For many, this will be a small increase that’s annoying but not impossible to manage. Again, homeowners are likely to cut back their spending on other things in order to make sure that they can meet their increased mortgage repayments.
•The rise in mortgage costs is likely to slow the housing market, which is not necessarily good news for the economy overall. The Government had been relying on private sector companies to build homes for sale: buying raw material to build houses from and paying for lots of labour. They aren’t going to want to see construction companies buying less and employing fewer people.
Don’t lose heart, though: a few weeks ago, the Government suddenly started talking about how it had now realised that it would be a good idea to build more homes for social rent, including Council housing. Most housing experts responded with “what took you so long?” Now it seems that the Government was just softening people up to the idea that the public sector would have to invest more in housing in order to compensate for a drop in what the private sector could deliver. There’s nothing new there.
•Finally, there’s the gamble of what the interest rate rise will do to businesses which are relying on loans to keep going – and those businesses which are setting up or considering doing so. Whether any businesses will go under remains to be seen. Whether businesses hold back on investing in the UK, given the affect the increased interest rate will have on any loans they need – but then again investment was slowing anyway, given the uncertainty over Brexit.
Most observers agree the increase has been necessary because of the drop in confidence in the UK economy which has come about since the Brexit referendum. As such, it is another cost of the referendum decision which Nigel Farage probably didn’t factor in to his calculations of the savings he alleged will result eventually.
On the other hand, you could just look at the whole muddle and conclude: what a strange, out of control way to run a country!