September 21, 2016    4 minute read

Interest Rate Changes: Opportunity Or Setback?

Lessons From History    September 21, 2016    4 minute read

Interest Rate Changes: Opportunity Or Setback?

Last month, the Bank of England (BoE) made the decision to cut interest rates for the first time since 2009. As part of a stimulus package for the UK economy following the Brexit decision, BoE Governor Mark Carney announced that rates would be cut from a previous 0.5% record low to a new all-time low of 0.25%.

Commercial Banks Movement

This has had repercussions across the financial sector, with Santander being the first high street bank to announce that it will be slashing the interest rate on its 123 bank account from 3% to 1.5%, effective as of November 1st. As the most popular current account in the UK, and with the possibility that other high street banks will follow suit, the impact is enormous.

There are some lenders taking a different approach, including building society Nationwide (which has confirmed that it will rebuke the Bank of England’s decision, maintaining its interest rates for savers, but passing the cut on to those in debt). The instant reaction (including the one from mainstream media), is that this decision will hit savers hard. There is no doubt that for some (especially those who rely on the interest from their savings as a source of income) the decision will be unpopular, and it will be particularly galling for those who were savvy enough to have shopped around for their savings account in the first place.

Who Benefits From The Cut?

This is all assuming that one has any savings, to begin with. There are two sides to every story, and those with few savings but with variable mortgages and other debts and loans stand to benefit from the cut, which will contribute to lower payback rates for the period for which it remains.

As with any economic stimulus, it is important that the decision is contextualised. The measure is one of four that has been designed to prevent an economic depression, the others being: a quantitative easing programme (long-hand for printing money a buy-up of corporate debt to drive down funding costs and a £100bn Term Funding Scheme to allow high street banks to borrow a proportion of their outstanding lending at a 0.25% rate.

It is also important to remember that the rate change is not a first, it will not be the last, and that the cut itself is hardly astronomical. There are many other instances of more significant changes, such as the interest rate hike of the early 1990s, which saw people paying up to 15% on their mortgages and other loans.

Lesson Learned

Arguably, as an impact of all the past recessions, lessons have been learned, not least by the Bank of England, which explains its insistence on keeping interest rates low (the recessions of the early 1980s and 1990s were both preceded by periods of high interest rates). History has taught individuals to become savvier with their money and not just to trust high street banks and lenders.

Millennials, in particular, are in a unique position here. Their current predicament has been created by a market that they were not old enough to be involved with, but are suffering the consequences of through high debt and a lack of property. As such, they have learned the hard way that, when it comes to their money, their destiny is in their hands. Research supports this, showing that more than 68% of Millennials are worried about money management and unsure about the financial options open to them.

It is critical for Millennials to increase their economic understanding, particularly when it comes to investing. Research has also shown that one way to encourage this is to make learning how to invest a fun activity.

Get articles like this straight to your inbox each morning with our Breakfast Briefing. Sign up by clicking here!

Log in with your details


Forgot your details?

Create Account

Send this to a friend