Reuters today reported .. HSBC, one of Britain’s “Big Four” banks, expects the Bank of England to raise interest rates twice over the coming 12 months … rates to be lifted by 25 basis points in November and then again in May 2018, taking Britain’s benchmark interest rate to 0.75 percent.
So perhaps this marks the start of a gradual normalisation of interest rates after they were pushed off a cliff in 2008. Then rates went from 5% to 0.5% in just a few months. A rate that stayed until 2016 when a lack of confidence by the experts prompted a move to the current all-time low of 0.25%. A move that fueled a fall in the value of sterling – so increasing the cost of imports and reducing the spending money of anyone going overseas.
Now we have had eight years of exceptionally low Bank interest rates. A situation where many have forgotten, or never experienced, living with the effects of rising interest rates.
Clearly in a rising-rate scenario any outstanding debts will require increased monthly repayments and this could be a problem for those with little or no slack in the budgets. When rates collapsed careful borrowers kept up their old repayment amounts – so reducing their total debt more quickly. But anyone who opted to go for reduced payments, or who started a new loan with lower rates, will face a hit eventually.
However if inflation takes a sudden upward turn then the controlled interest rate strategy of small steps upwards over an extended timescale will be ditched in favour sudden hikes … so don’t get caught out.