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The truth about interest rates

The truth about interest rates

Authored by Phil Meekin

Phil Meekin

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Approximate read time: 2 minutes

For six years, the Bank of England has kept interest rates at a record low of 0.5%. Last year, Prime Minister David Cameron said it would be ‘lovely’ if the rock-bottom rate remained indefinitely.

As the old adage goes, that would be great for mortgages but not quite so rosy for savers. Cue lots of noise at the back from the latter.

Since March 2009, homeowners have seen their monthly mortgage repayments reduce considerably making a great number of people very happy indeed. In turn, the slashing of interest rates has raised the level of disposable income available playing a large part in stimulating the economy. People suddenly have a fair bit more cash available – and they’re spending it.

All this means that, while the low interest rate currently feels something of a ‘norm’, the effect it has had on our country’s monetary conditions is considerably more pronounced than you may think.

A 2014 study into what households are being charged by banks when borrowing revealed that commercial interest rates have fallen steadily and against a resolutely stable Bank of England base rate.

Put simply, the study by Henderson Global Investors confirms our banks’ ability to continue lowering their fees as they become better funded. As a result, they have provided further stimulus for our economy.

So, are rates going to rise?

It has been reported UK savers have seen nearly an 80% fall in the amount they’ve earned on their funds; so it is understandable many are crying out for an increase in interest rates. The truth about interest rates, however, may not be what they want to hear.

No one knows for sure, but all signs seem to be pointing to the historic interest remaining for a while. The economy appears to be stimulated; so why would the Bank of England risk damaging the amount of disposable income nestling in people’s wallets by raising the cost of borrowing money?

Mr Cameron’s comments may have angered savers, but he appears to have a point. If banks are able to pass additional savings on despite the interest rate freeze, that’s good news for us all.

We’re all still feeling the rippling effect of the great financial crash and credit crunch in 2008. Such disastrous financial situations are long-lasting, it is clear the humble interest rate has been doing more good than bad. Keep an eye on it, because like any good friend, it could surprise you; but we don’t think it will rise any time soon.

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