why are interest rates rising

Why Are Interest Rates Rising?

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It’s all over the news, the Bank of England has increased rates again

For the fifth time in a row, the rates have risen. Industry experts believe that they will continue rising in an effort to battle record UK inflation. But what exactly does that mean? It’s a title we all hear about but how do rising interest rates actually slow the levels of inflation? And what exactly is inflation? And why are interest rates rising off the back of this?

There’s a lot of questions there that need answering. It’s quite easy to read these titles on the news and not actually understand what they mean and how they effect you. Let’s try and simplify this all and break it down for you.

Inflation, put simply, is how the cost of things rises over time. For example, let’s say the cost of a loaf of bread is £1 today and tomorrow it rises to £1.10. This puts bread inflation at 10%. When we say inflation though it takes into account the costs of everything. That’s from fuel, to electricity bills, to a pint down your local and even as far as the cost of a staple. So with inflation hitting record highs, the cost of living has really gone up. This is due to many contributing factors, but what do countries bank’s do to combat this?

How putting interest rates up reduces inflation

The main policy they have to combat rising inflation is to increase interest rates. This means the interest rate at which the Bank Of England lends money out to other banks such as your Halifax’s and Santander’s is higher. This has a knock on effect that they then raise their interest rates to retail customers like you and me. And all the way down the line what this does is it squeezes people’s budgets in an attempt to get spending down.

They want to reduce spending so that the heat comes off people buying products and services which will then, in turn, bring down demand. And when demand for goods and services comes down, the price will therefore follow and inflation will cool. That is a very simplified way at looking at it all but it gives you a basic overview of what the Bank of England is trying to do with these rate rises. Interest rates have been at a record low for two years which has made borrowing so cheap for so many of us. This has stimulated the market and kept the economy strong whilst we had COVID to deal with. But with this largely behind us, the bank needs to tighten the purse strings to make sure that inflation doesn’t spiral out of control.

What does this mean for my personal finances?

If you are a motorist you will see the cost of fueling up has risen dramatically and that’s quite evident. Along with other costs you will see generally that groceries are slightly more expensive than before along with many other things you normally purchase. If you’re a homeowner hopefully you are fixed into a deal with your lender. If not and you are on a discount rate or variable rate, you will see your mortgage monthly payments increasing as lenders increase their rates.

Overall the cost of living will be rising and you will feel the pinch in your wallet. The good flip side of this is your savings accounts will start to pay out more interest as the rates rise. So this will encourage more people to save which is the Bank Of England’s strategy to get people to spend less if they are saving. If we come back to the original question of why are interest rates rising, hopefully we’ve given you a simple answer.

Coping with the rising cost of living

There are many small things you can do to help with the rise in cost of living. We have an article that really goes in depth and gives 10 tips to help with the cost of living crisis. It’s critical in these times to have your finances in order so that you can make the best decision in the ever changing market.

With that being said, there’s no better way to get this all in order than speaking to a financial advisor. You may have old pension pots you’ve lost track of. Or you need help from a professional to setup some investments to work for you. At the end of the day with inflation your money is devaluing at that rate so you need to be making it increase in value to keep up. Having it in a bank account not earning anything means essentially you are losing money.

Get in touch with our vastly experienced advisor Tony today to book your free consultation.

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Ashley Hollom
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