fbpx
Editorial

Why interest rates will invariably rise much more

Why interest rates will invariably rise much more

WHY INTEREST RATES WILL INVARIABLY RISE MUCH MORE

Rates are expected to hit 2.5% within a year — but that is still far below the long-term average

Within hours of the Bank of England raising its main interest rate to 1 per cent in May and warning there would be more to come, mortgage lenders got busy pulling some of the crazy-low rates they had been offering.

Even 2.5 per cent will still be a very low rate. Since the Bank of England was founded in 1694 its Bank Rate (under various names) has been 2.5 per cent or below for only about a sixth of the time it has existed. Most of that was due to the emergency rate of 2 per cent that began with the second world war and ended more than a decade later. Almost all the rest occurred in the past 13 post-banking crisis years, when it was under 1 per cent.

The years since the crash of 2008 have seen historically low interest rates and this was followed by another historic fall during the pandemic, to 0.1% the lowest base rate in history. What is really shocking is that so many people have been borrowing on the bases of sub 1% interest rates, without giving a single thought to the fact that they will invariably rise. 

The danger that many borrowers now face, is the correlation between the incremental rises in relation to their existing rate. for example, if we were to use an average interest rate for the 80s, 90s and noughties, we could for ease of calculation say it was on average around 8%.

A borrower taking out a mortgage at 8% would find that an increase of 2% would result in their total interest payments rising by 25%. 

The same example for borrowers taking out new mortgages since the pandemic would probably demonstrate that they borrowed as much as they could (an then some) at a rate of 2% but an increase of 2% added to that (which is the minimum anticipated rise) will double their interest payments and in the unlikely, but not impossible scenario that the base rates rise by 4%, their interest payments will TRIPLE!

There must be a lot of borrowers having sleepless nights at the moment, and if they are sleeping, they shouldn’t be, they should be sat, burning the midnight oil, trying to prepare for the worst case scenario, because the unfortunate side-effect of economies re-opening after the largest period of dormant productivity in history, followed by the consequences of the war in Ukraine, have unleashed the horrors of inflation on the world. 

There is no doubt that this will continue to inflict an endless round of worldwide price rise upon rise for years, turning savers in to paupers and eroding the salaries of those most in need.

Inflation is good for borrowers as it erodes debt!

Yes, this is true, but in order to restrain inflation, interest rates can rise to terrifying levels, let’s not forget that as recently as 1979, interest rates peaked at 17% and a few years previously, in 1975 inflation has peaked at 25%.

It could be argued that we are in a far more precarious climate now, so all bets are off. Anyone who predicts what inflation or interest rates will be in a year or two is simply guessing!

As inflation takes off, the only way the BoE can try to control it is by raising the Bank Rate. And the cost of money lent to us can only go one way — up, up and, probably, up.

0 0 votes
Article Rating
Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments