Q&A: Interest rates rise - views from Wales
Interest rates have risen for the first time in more than 10 years. But what does it mean for savers and borrowers, home-owners and businesses in Wales?
We asked three financial and business experts from Wales. Julie-Ann Haines is chief customer officer with Principality Building Society and chair of UK Finance's Wales Mortgage Committee; Siobhan Thomas is director and pensions and investment specialist at Seer Green Financial Planning in Newport; Ben Cottam is head of external affairs at the Federation of Small Business in Wales.
Why is this happening now?
Julie-Ann Haines, chief customer officer at Principality Building Society: There have been movements in some of the key economic indicators monitored by the Bank of England, which have caused the Monetary Policy Committee (MPC) to act. Inflation has jumped to 3%, while unemployment is at its lowest since 1975. This means there is the chance of wage inflation which so far hasn't risen above inflation levels. Mark Carney warned that he expects inflation to rise a little further so these ingredients mean the MPC estimates the slack in the economy has fallen sufficiently for them to tighten monetary policy.
Ben Cottam, Federation of Small Business: The rates rise is widely attributed to increasing inflation, following the longest period in living memory without a rates rise.
Siobhan Thomas, director of Seer Green Financial Planning, Newport: Inflation is driving the rate rise. Interest rates are used to control inflation, a rate increase will help slow inflation, which in recent months has been peaking.
What does it tell us about where the economy is now?
Julie-Ann Haines: The UK Purchasing Managers Index (PMI) surveys suggest that the economy will continue to grow but below the traditional pace given the current higher levels of inflation. According to the latest ONS statistics, the economy grew by 0.4% in Q3. Weak economic growth reduces the chances of an interest rate rise but an improving picture makes it more likely.
- How would an interest rate rise affect me?
- First interest rate rise in a decade
- Inside the mind of the Bank of England
- Is now the time to raise interest rates?
Ben Cottam: At FSB, we appreciate the effort that the Bank of England has gone to in order to ensure that this rates rise is widely predicted by businesses across the UK. Small business owners consume media like everyone else, so many will have priced in an increase.
Siobhan Thomas: Economically, we remain vulnerable with so much uncertainty around Brexit. The interest rate rise will help strengthen the pound, but it may stagnate growth in the economy.
The rise to 0.5% today is the first since July 2007, when the rate rose to 5.75%, before falling again a few months later. It also reverses the cut in August 2016 after the Referendum vote. But looking back at the Bank of England rates over 40 years, interest rates hit a peak of 17% in 1980.
Will it encourage more people to save?
Julie-Ann Haines: Savers will welcome a rate rise, although the effects are unlikely to be felt immediately. Banks now make it easier for savers to compare and switch products, and these improvements will help customers shop around to find the best deals as commercial rates reflect the increase. These have been frustrating years for savers. But banks and building societies have simplified their product ranges and made it easier for people to find the right savings product for their needs - which is good news for customers.
The electronic Cash ISA Transfer Service has helped to reduce switching times; interest rate disclosure on savings accounts has improved; and some providers have streamlined their savings ranges to help customers navigate the market. These market improvements will help customers shop around to find the best deal as interest rates rise.
Cash savings accounts offer a range of interest rate options from instant access accounts paying variable interest to long-term fixed interest deposits. The Financial Conduct Authority's recent Retail Banking Review identified 117 providers offering 1,737 different savings products. These accounts include easy access savings accounts, fixed-term products and tax efficient ISAs.
Most accounts are easy access paying variable interest which have the potential to follow the base rate higher.
Siobhan Thomas: Initially it will be a small rise so the rates for savers will continue to be pretty unattractive and will struggle to protect savers from inflation.
Ben Cottam: For businesses, the key is having the confidence to invest and grow their business. Businesses want to feel resilient and sustainable. What's critical in achieving this, is that rates rise at a pace that small firms can handle. We cannot have a surge - an increase must be given time to settle before further rises. Small firms have lots to worry about with rising input costs, business rate hikes, flagging consumer demand, late payments, and an uncertain economic outlook - the last thing they need now is borrowing costs increasing at a speed they can't absorb.
Who might it hurt?
Julie-Ann Haines: The majority of borrowers will be protected from any immediate effects of today's small increase because they have a fixed-rate mortgage. Over the last year, two thirds of first-time buyers have opted to fix their rate for up to two years, with a further one in four opting to fix for two to five years. The impact on individual borrowers will vary depending on the loan size, length of term and the repayment method. According to UK Finance, assuming a 25-year repayment mortgage loan, a 25-basis point rate rise from where current mortgage rates are would lead to an increase in monthly repayments of under £13, per £100,000 of debt.
Mortgage holders on a 'base rate tracker' product will automatically move to the increased rate. If you have a 'variable' or 'discount' mortgage product, your mortgage payment is likely to go up in the near future. However, consumers who have opted to take out 'fixed' rate mortgage product over the past few years will not see an increase until the end of the fixed period.
Given that variable rate lenders assess the ability of applicants to pay at much higher interest rates, most should be able to cope with any increases as they filter down.
If anyone is unsure or concerned about how the Bank of England base rate change will impact their mortgage payment, we would initially recommend they check with their mortgage provider. If people's mortgage payment is going to increase, people could review their household expenditure to cut back on luxuries or unnecessary costs to offset the rise in mortgage payments.
Siobhan Thomas: Borrowers - variable rate/tracker mortgage borrowers or those coming to the end of a fixed period will feel the effect of the rate rise, especially just before Christmas when spending spikes.
Ben Cottam: Firms in the tourism and manufacturing sector in Wales have benefited from a weak pound. A rate rise could dampen output in these sectors. We already have an issue with small business appetite for finance - only one in 10 is currently applying for external finance. A rate rise won't help with that, both in terms of increasing borrowing costs and exacerbating the perception that finance is hard to secure if you're a small business owner.
What would you like to see happen next?
Siobhan Thomas: We would like to see the Bank of England raising interest rates at a slow and steady pace during the next few years.
There are too many uncertainties for us economically and a quick successive rate rise would run the risk of restraining growth at a time when economic activity is not high.
Ben Cottam: Awareness is critical - any firm that has set up in the last decade has only known rock bottom rates. Policymakers have a responsibility to inform small business owners and the self-employed about the implications of a rate increase. Small firms have lots to worry about with rising input costs, business rate hikes, flagging consumer demand, late payments, and an uncertain economic outlook - the last thing they need now is borrowing costs increasing at a speed they cannot absorb.
Also, it is important to remember that for the smallest businesses, personal and business finance is closely interlinked - if, for example, their mortgage and car leasing costs start to rise in a way they hadn't considered, that could impact the ability of some to create jobs and growth.