What does the base rate rise mean for your household?

As expected, today the BoE raised interest rates again from 0.5% to 0.75%. The move was well-signalled and widely expected by the markets, and likely had already been mostly priced in to consumer interest rate decisions by banks and other lenders.

Just to quantify it - on a £250k mortgage, an extra 0.25% on interest rates will increase monthly payments by about £350 a year for those on a variable rate.  Several more 0.25% increases are forecast to occur this year - it’s very possible that by the end of the year the burden on a £250k mortgage could have increased over £1000 a year. 

The rationale for interest rate rises is pretty straightforward - if you raise the cost of borrowing money, increasing the cost of making investments, reducing the pounds in the pockets of consumers, reducing demand which then reduces prices. However, the challenge here is how much of the inflation is due to exogenous factors - i.e. rising energy costs, which are principally caused by geopolitics (the war in Ukraine and the various reactions to it). 

Right now we’ve got households who are seeing £2000 increases in their annual domestic energy costs (with more forecast to come in the autumn), increases in taxes (NI and council tax), above inflation rises in other utility bills, rising travel costs on public transport as well as at the pump, and rising food and other prices due to the knock-on impact of energy costs as an input to other prices. Thousands of pounds of cost rises for households, even before the interest rate change. It might be very possible to suggest that consumer demand will slow down even without these interest rate increases, or worse that these increased costs will make little difference to inflation.  

The Bank of England's Base Rate change over time

The risk with increasing interest rates too far is that the air comes out of the housing market balloon too quickly (that it pops). A reduction in real housing prices would cause a very dramatic reduction in consumer confidence and spending (and would drastically reduce the support to spending from the practice of remortgaging a more valuable asset). Which then impacts employment and earnings, and so forth…

It seems likely that households will be put under very severe pressure over the coming months as this crisis plays out, and that the government and BoE will have a very difficult job to do to walk the tightrope of keeping the economy on track.  

Our advice: sign up to nous.co, where soon you’ll be able to see tools that enable you to see the specific, personal, impact of all of these changes on your particular household budget. Get educated on how much this is going to cost your household. And then figure out how best to save/cut as necessary. Follow us on social (get_nous) and our blog for regular hints/tips as well as updates. 

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