Interest rates are rising globally – and it means changes to the way we spend and save money.
On 15 June, the Bank of England – the United Kingdom’s central bank – raised interest rates for the fifth consecutive time in six months to 1.25%, reaching the highest they’ve been since 2009.
Meanwhile, on the same day, America’s central bank, the Federal Reserve, raised interest rates by three-quarters of a percentage point to a range of 1.5% to 1.75%, the highest increase since 1994. It marked the third rise since March.
Both were followed by Brazil, Saudi Arabia, Switzerland and other countries – with at least 45 countries having raised rates so far in 2022, as this map of global interest rate rises from the New York Times shows.
What are interest rates?
Interest is the cost of borrowing money, usually given as an annual interest rate. It is one of the main tools central banks can use to try and slow rising prices – inflation.
Soaring demand coupled with supply shortages as the global economy bounces back from the pandemic, and the impacts of the Russian invasion of Ukraine are sending inflation to new highs. So central bankers – who manage each country’s currency and monetary policy – are taking action.
Here are some of the main ways our finances are affected.
Interest rates and home loans
If you took out a mortgage to buy your home in the UK, the cost of your monthly repayment may rise. The amount will depend on the size and the type of your loan.
The latest interest rate rise in the UK would mean homeowners paying up to £25 more each month, according to BBC estimates, for those on a tracker mortgage.
But you may see no change if your home loan is on a fixed rate – as 74% of home loans in the UK are, according to UK Finance.
“A sizeable majority of borrowers will see no immediate increase in their monthly repayments,” it says.
Interest rates and credit cards and other loans
If you have other borrowing, like credit cards, personal loans or car loans, the interest rate on these may rise, too. As rising inflation fuels the cost of living crisis, policymakers worldwide are worried about rising household debt globally, and the ability of consumers to pay back their debts.
For example, household debt in the US now tops $15 trillion, with mortgage and auto loans rising by $250 billion and $11 billion, respectively, in the first quarter of 2022, according to the Quarterly Report on Household Debt and Credit from the Federal Reserve Bank of New York, one of 12 Federal Reserve Banks in the US.
By raising interest rates, central bankers hope to dampen runaway consumer spending and slow rising inflation.
Interest rates and savings
Higher interest rates, in theory, mean people receive a better return on their savings, which should encourage them to save rather than spend.
In New Zealand, for example, state-owned bank Kiwibank announced in October 2021 that savers would benefit from higher returns on a range of savings and term deposit rates – where money is locked away for an agreed length of time. This followed the first rate rise in New Zealand for seven years.
But sometimes higher savings rates can be slow to appear – if at all.
“It can take a few months for savers to see rate rises passed onto them, but many may have only had 0.25 per cent or even less passed onto them since December 2021,” Rachel Springall of Moneyfacts told the i newspaper in June 2022.
Source: WEF
