Interest rates, borrowing, mortgages and the Bank of England. If there is a string of words out there that can do a better job of making people switch off and glaze over then I’d like to hear them.
Nonetheless, they are terms set to dominate headlines today as we digest the second hike in the bank base rate since the financial crisis a decade ago.
Important as the news is that the UK’s central bank is continuing its very gradual tightening of monetary policy, for many people out on the street a 0.25% hike in the rate means very little. No amount of ‘BREAKING NEWS’ kickers or live blogs will change that.
An unexpected jump in their mortgage repayments, however, would mean an awful lot. As would a letter explaining their credit card bill will be higher next month.
Household spending and debt
For the first time in 30 years Brits are now spending more than we earn, funding our lifestyle by borrowing and eating away at our savings, a trend that the bank hopes to limit, but also a trend likely hitting lower earners the hardest.
After a decade of record-low borrowing rates, one in five of the lowest UK earners are now spending 30% of their pre-tax income on paying off debts according to research from think tank the Resolution Foundation, leaving some set for tougher times ahead as interest rates potentially creep up over the coming years.
While the same research, published in February, did find that overall UK households were “relatively well placed” to deal with future rate rises (as long as they remained below historic levels), it also said just under a third of working age households showed at least one sign of being in ‘debt distress’. Interest rate rises could pile the pressure on some 1.2 million households already struggling.
As always there will be winners and losers from any economic update or policy change. Fortunately, the think tank suggested the dominance of fixed rate mortgage terms means at least homeowners should be shielded from any immediate impact on monthly payments.
Savers, often highlighted as beneficiaries of rate rises, are most likely to be the 'winners' from the hike, but given the lacklustre attempts of banks to bump up savings rates following the last increase, I wouldn’t hold my breath for any great boost to your rainy day cash pot any time soon.
As we absorb the countless market commentaries and analysis that inevitably follows any rate hike we need to remember the people out there we are failing to engage with these issues and try to work out a way to better prepare them for the impact these big economic decisions will have on their wallets both now and in the future – waiting until it hits home with a repayment bill on the doormat is leaving it too late.