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Finance Friday: Interest rates

There’s a lot of speculation in the financial press about when or if interest rates will rise. The Bank of England issued ‘forward guidance’ that suggested that rates might be increased when the figure for unemployment is down to 7% and it’s close to that now. These figures are ‘seasonally adjusted, so spring could change that figure and the forward guidance is just that; guidance, not a certainty.


If rates do rise when unemployment goes down and there are signs of economic growth in the economy it won’t effect many interest rates. As rates dropped some rates for credit cards actually went up, but mortgage rates and some rates enjoyed by business are low. If rates go up 0.25% it won’t have a big impact on people with mortgages. It will dampen demand a little and that will be a good thing. If building societies and banks factor in demand and raise rates more where demand for mortgages is higher, in the south east and London; then the effects will be minimal. Higher mortgage rates in London would be better than a price bubble making housing unaffordable.


Interest rates are determined based on risk too and mortgages are considered low risk compared to pay day loans, for example. The rates should be matched to risk, but although many people are in default with mortgages, repossessions are not as high as in the US and other countries. Without the threat of repossession, secured loans aren’t really secured. The whole economy isn’t really working as it should. This could mean higher mortgages in the future to compensate for the higher risk. Investors are looking for better returns on their investments, as pension funds have more liabilities than assets.

The Pound

Increasing interest rates would also affect the value of currencies. An increase in the  Bank of England base rate could push the value of the pound up against other currencies. This would make imported goods and commodities less expensive and so encourage economic growth and make things like oil and imported energy cheaper. It would make our exports more expensive, however.

Increasing interest rates also makes the stock market look less attractive to some investors. Pension funds might put their money into bonds rather than shares, but only if the returns are significantly higher.

Bond prices

The price of bonds traded in the markets went up as interest rates dropped and bond holders chased the best returns. If rates begin to rise then bond prices in the markets will come down again.


The big danger is inflation. If wage demands by powerful workers are successful, that will stoke inflation as demand for goods increases. Increased demand could mean higher prices and so a spiral can develop of demands for higher pay chasing higher prices.

The most likely reaction to a small increase in interest rates by the Bank of England will be a similarly small increase in some mortgage rates. Many people now enjoying low rates will have to pay more. First time buyers faced with high deposits and low rates could see the deposits required go down as interest rates go up and so things could get easier for first time buyers.

How will higher interest rates effect you? Please use the comments box to share your views. You can also follow me on Twitter.

One Response

  1. Pingback: The Review: Another week of writing and photography | Mike10613's Blog

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