The Bank of England

Historic Interest Rates

One of the problems with historical records is they sound grand but often end up obfuscating other historical records. The announcement by The Bank of England on 3rd November that interest rates were to rise by three-quarters-of-one-percent (0.75%) meant that this was the biggest single jump in rates for more than three decades, thirty three years to be precise. Whilst not ignoring the significance of this move, which is a further bid by the central bank to stem rising inflation, it could allow us to forget that this also brings to an end one of the longest periods of low interest rates in history.

Rapidity causing the biggest issue

The low rates of interest that have prevailed since the economic crash of 2008, may have helped thousands get onto the property ladder, but it has equally created a scenario whereby there is little or no benefit in saving or investing. The result is any movement from near zero was always going to bite and the rapidity and scale of the increases, now looks set to cause massive issues.

By focusing on the historical nature of the interest rate rise, it makes it sound as though this amount of movement is unfounded territory or the new rates are extreme – which of course they are not – it has just not happened recently. However, for those enjoying the low rates for so long, it will come as something of a shock. This is further impacted by the lack of contingency built up in the form of personal savings – another effect of ultra-low interest rates. Research by The Money and Pensions Service suggests a quarter of UK individuals have less than £100 in savings. The combined result of higher costs and little or no fallback position expected to lead to a spike in mortgage defaults and repossessions in 2023/24.

Good news for savers

Whilst the increase in interest rates is undoubtedly going to cause issues in the housing and mortgage markets and will see individuals and businesses paying more on loans and lending, it is good news for savers. They will see history from a different perspective and will have had to work extremely hard to generate any interest on their investments over the last 14 years. Unless you were willing to put money into limited access bonds for 5 years or more or invest in slightly more risky products, you were unlikely to generate much more than 1% return. But this latest round of rate rises means that even regular high street bank savings accounts are nudging up towards 5% and if you don’t need access to your cash for a year or two, you could be approaching 6%, with little or no attached risk.