How will the latest Bank of England interest rate hike affect consumers?
Worried homeowners and potential buyers have been tracking interest rate movement with concern over the past year and a half. With inflation soaring, central banks around the world have been hiking their base rates in a bid to try and bring inflation under control. However, inflation still stands at very high levels in the UK, meaning the BoE continues to hike rates.
After its latest Monetary Policy Committee meeting in June 2023, the central bank announced that it was increasing interest rates again by 50 basis points. As a result, the base rate has soared from 4.5% to 5%, the highest it has been in 15 years. For many, this latest rate increase will cause even more worry, but the BoE deems it necessary because inflation is still way above the 2 percent target – it currently stands at 8.7%.
Of course, it is not just homeowners who are feeling the negative impact of the rate increases. Businesses and those with variable-rate loans will also be affected, as they will see repayments increase once again. Many are already struggling after seeing interest rates increase rapidly from record lows at the end of 2021 to the current 5% level.
How will these rate increases affect consumers?
There are many ways in which the latest rate increase will impact consumers and the economy as a whole. In fact, the effects of rate increases are already being seen as a result of previous hikes since December 2021. So, let’s take a look at some of the potential effects of these increases:
Impact on repayments
One of the obvious effects of rising interest rates is the impact it will have on mortgage repayments. Many people will struggle to keep up with the rises in their variable rate mortgage repayments following the latest 0.5% hike, which could leave many homeowners facing serious financial woes. Those with large mortgages will really feel the impact, and it could affect their ability to keep on top of the repayments as well as keep up with other essential payments each month.
Effect on property buyers
The effects of the latest rate rise will also be seen when it comes to the number of people taking out mortgages to purchase a property. For many, even if they have a deposit saved, getting an affordable mortgage will be out of the question. For those who want the stability of a fixed-rate mortgage, typical rates are likely to be very high, and they will then be stuck with these rates even if the base rate drops in the months to come. Also, those looking for variable-rate mortgages will find it more challenging to find an affordable deal following yet another rate rise.
The impact that the latest rate rise will have on mortgage repayments could increase repossessions. While banks and lenders are being urged to have strategies in place to help those who are struggling due to the series of rate increases, they can only provide so much assistance before repossession becomes the only option. So, there could be a rise in the number of repossessions as more and more people find that they cannot make their mortgage repayments.
Reduced disposable income and impact on consumer spending
Naturally, higher repayments due to increased interest rates mean people will be left with less disposable income. This will significantly impact consumer spending, deposits into savings accounts, lifestyles, and the economy as a whole. Many people will have to tighten their belts once again as they try to stretch their income far enough to accommodate the rise in their mortgage repayments. This means they will have less money to spend on going out, shopping, traveling, and more. Many industries will also suffer as a result of this, including the retail and hospitality industries.
Effect on tourism
Over recent years, since restrictions were lifted following the global pandemic, people have been desperate to travel and enjoy holidays abroad or staycations. However, both can be expensive and with the increases in interest rates, a holiday might not be financially viable for many households. The latest increase could result in fewer people booking holidays in the UK and abroad. It could even lead to people canceling holidays they have already booked because they can no longer afford it.
More strain on debt companies
One of the other possible effects of the latest rate increase is that it could further strain already struggling debt advice and support agencies. Many agencies have already been overwhelmed with inquiries and cases over the past couple of years, and the latest move from the Bank of England will likely lead to even more worried consumers turning to debt companies for advice or practical help.
Impact on businesses
Of course, businesses will also suffer due to the interest rate hike, which could affect them in many ways. The effects could be devastating for some businesses, from rising commercial mortgage repayments to higher repayments on variable-rate business loans and reduced consumer spending. As a result, we could see more businesses closing down, particularly smaller ones with tighter budgets. This could also impact employment levels, as those working for companies that are forced to close or reduce staff numbers will find themselves out of work.
A grim outlook for many
The Bank of England has stated time and time again that interest rate hikes are part of an aggressive strategy to tackle inflation. However, while this might be true, it does not change the fact that many are facing a bleak financial future at the moment. Bills are rising, living costs are soaring, and the increase in interest rates means added financial stress for millions of people across the country.