Interest rates are rising – how are you affected?

  • Countries like the UK, South Korea, New Zealand and Brazil have all raised interest rates in 2021.
  • The United States, the European Central Bank and Japan are among those reducing their emergency support for the economy in the event of a pandemic.
  • Borrowers and savers will be affected in different ways if rates for products such as mortgages and auto loans change.

Interest rates are rising globally – and that means changes in the way we spend and save money.

The Bank of England – the UK’s central bank – raised interest rates for the first time in more than three years in December 2021, from 0.1% to 0.25%.

South Korea, New Zealand, Brazil, Russia and South Africa are among the other countries that raised interest rates in 2021.

The US central bank, the Federal Reserve, plans to raise interest rates three times in 2022. It is also accelerating the reduction of economic support introduced during the pandemic.

The European Central Bank, which sets interest rates for the 19 European countries using the euro, and Japan’s central bank, the Bank of Japan, are also cutting their economic support – although they have so far refrained from reducing interest rates.

What are the interest rates?

Interest is the cost of borrowing money, usually expressed as an annual interest rate. This is one of the main tools central banks can use to try to slow rising prices – inflation. Soaring demand coupled with supply shortages as the global economy rebounds from the pandemic is pushing inflation to new highs. So the central bankers – who manage each country’s currency and monetary policy – ​​take action.

Here are some of the main ways our finances are affected.

Interest rates and home loans

If you took out a mortgage to buy your home in the UK, the cost of your monthly repayment may increase. The amount will depend on the size of your loan. For example, based on an average mortgage of £140,000, banking trade association UK Finance estimates an average increase of £15 per month from the Bank of England’s last interest rate hike. It’s for the 850,000 mortgage borrowers with a follow-on mortgage – a type of variable rate mortgage.

But you may not see any change if your mortgage is fixed rate – as 74% of UK mortgages are, according to UK Finance.

“A large majority of borrowers will see no immediate increase in their monthly repayments,” he says.

A graph showing the relationship between the bank rate and mortgage rates.

Fixed-rate mortgages protect many borrowers against rising interest rates – but globally, rising household debt is a concern.

Image: UK Finance

Interest rates and credit cards and other loans

If you have other loans, such as credit cards, personal loans, or car loans, the interest rate on those may also increase. Policymakers around the world are already worried about rising household debt around the world and the ability of consumers to repay their debts.

For example, household debt in the United States now exceeds $15 trillion, with car loans, student loans and credit card spending up $28 billion, $14 billion and $17 billion. dollars respectively in the third quarter of 2021, according to the Quarterly Household Debt and Credit Report from the Federal Reserve Bank of New York, one of 12 Federal Reserve Banks in the United States.

By raising interest rates, central bankers hope to curb runaway consumer spending and slow the rise in inflation.


Interest rates and savings

Higher interest rates, in theory, mean people get a better return on their savings, which should encourage them to save rather than spend.

In New Zealand, for example, state-owned bank Kiwibank announced in October that savers would enjoy higher returns on a range of savings rates and term deposits – where money is locked in for an agreed term. This followed New Zealand’s first rate hike in seven years in October.

But sometimes higher savings rates can be slow to appear, if at all. Commenting on changes to savings accounts following the Bank of England’s rate hike in the UK, Anna Bowes of Savings Champion, which offers free savings advice, said: “It’s been a very little so far”.

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