Phil MeekinView Profile
The economic environment will affect your business and lifestyle, no matter how well your business runs.
This is doubly important to bear in mind when economic fluctuations take effect, as without noticing, it
may transform your margins either in a positive or negative way depending on your response.
Today saw the Bank of England raise the level of interest by 0.25 percent, which may not seem a notable figure. Although it is unlikely to
Below, I look at the impact on businesses and individuals.
It is crucial for business owners to understand the mechanisms of such changes and how to offset or even capitalise on them.
The Bank of England has kept interest rates artificially low since the global financial crisis in 2008. This was to support businesses and the banking system until they recovered. Despite all the doom and gloom in the media about such as Brexit, it is generally accepted that the UK economy is in good shape, but if not controlled it could “overheat” leading to inflation.
Looking at the bigger picture, our economy is largely consumer-driven and an increase in interest rates generally triggers more saving and less spending by consumers. Rather than slamming the brakes on the economy, a small increase will take the foot off the accelerator.
Interest rates can be a signal to either expand your business or to constrain or reduce it – depending on the type of business and how you feel it will affect it.
Borrowing money, for example, may become slightly more expensive as lenders increase their lending rates in the wake of an interest rate rise, but perhaps not so great as to cause you to re-think a large investment if you still think it is viable. You should at least recalculate any business plans which feature borrowing to take new rates into account.
In the longer term, Mark Carney – Governor of the Bank of England, previously indicated that he did not anticipate rates reaching 2008 levels of around 5%, but perhaps peaking nearer 3%. This is a good indicator to enable businesses to plan their longer-term borrowing and funding.
So, from a business perspective, this increase should not cause any immediate panic or knee-jerk reaction but is a good opportunity to review your business plans.
On an individual level
Those saving will see a better return and if you are approaching retirement and wanting to buy an annuity that too should improve.
The increase should not have a great impact on the vast majority of householders with mortgages. Whist many households will be able to absorb relatively low increases, for those who are carrying a large amount of personal debt, it could be the difference between being able to afford the repayments or running into difficulties.
Mortgages which are variable rather than fixed rate will be the first to be affected. Credit expert Experian has calculated that a 0.25% interest hike means that a typical borrower on a standard variable rate or tracker mortgage of £250,000 will need to pay around £400 per year extra. People on fixed rate mortgages will only see increases when they renegotiate the mortgage at the end of the fixed period.
Many credit card loans will also see repayments incur higher rates of interest.
This is a time to act quickly if you or your business is feeling the pinch or are worried in the wake of interest rates increasing. There are many credit card companies which will allow you to renegotiate existing loans to suit your circumstances.
The same can be said for mortgages – variable rate mortgages may see interest rates push repayments higher and you may prefer to search around for better deals or a fixed rate mortgage.
And if you or your business find that you are really struggling to make repayments on loans, or are experiencing cash-flow problems then you should seek help from a professional insolvency practitioner or business turnaround specialist who may be able to provide solutions before it is too late.
Don’t let the rise in interest rates catch you out!