The UK’s economic landscape has been extremely changeable in the past three years, with systemic shifts in international and trade relations, as well as governance and policy decisions, making for a costly time to be alive. A key metric for this has been interest rates, which are at near-historic highs as of the start of 2024. Will this trend of high interest prevail?
The Economic Climate
At present, the UK’s economic climate is dire. The multiplicative impact of Brexit, Russia’s invasion of Ukraine and local government policy failures have led to a financially difficult environment for the average family and for the average business. The major financial story for the last three years has been the ‘cost-of-living crisis’, wherein a high rate of inflation has caused essential living costs to dramatically increase – further eating into household wages which have not grown to meet them.
Interest Rates
As of the beginning of 2024, interest rates have remained in a heightened state since they began to rise at the start of 2022. This has been especially impactful for mortgage holders, as new first-time buyers and existing homeowners coming to the end of fixed-term agreements found their monthly payments increasing significantly.
For those already in debt, high rates of interest are nothing but disastrous. Short-term financial products like bad credit debt consolidation loans can be essential for minimising unnecessary costs, but only plug a gap.
The Bank of England, Monetary Policy and Domestic Impacts
We have already seen and acknowledged the impact of interest rate rises on new and existing homeowners, via their mortgage agreements. However, what we haven’t explored is the impact of UK monetary policy on those hikes, and the manner in which both government policymaking and reactive Bank of England measures play into them.
The mortgage crisis was precipitated, in large part, by the announcement of inflationary government policies by short-lived UK Prime Minister Liz Truss and her Chancellor Kwasi Kwarteng. A raft of ill-advised cuts to public services, designed to fund tax breaks for higher earners, caused a shock to an already-reeling economy, and caused the Bank of England to intervene by hiking interest rates by a historic margin.
The principle behind Bank of England interest rate rises relates to expenditure and borrowing. High rates of interest disincentivize spending, where costs associated with interest are increased. The result is a cooler market, and a slower rise in costs or prices elsewhere. The impacts of 2022 are still affecting borrowers today, though successive rises to the Bank Rate have superseded that historic spike.
These policy decisions sit in stark contrast to the decisions made in the aftermath of the 2008 banking crisis, wherein quantitative easing (QE) was used to introduce more money into the economy, boosting the value of bonds and pulling interest rates down as a result. At present, we are facing another year of high interest rates – unless the government and the Bank of England are both able to see the right fall in inflation rates.
