An Economy in Turmoil: What Interest Rate Adjustments Mean for the UK

As we continue to weather the historic storm of COVID-19, the country’s economy continues to be afflicted. With the latest news from the Bank of England announcing freezing of interest rates at an incredible low of 0.1%, further predictions abound of the base rate reaching zero – or even a negative figure. 

After a recent vote from the Monetary Policy Committee chose to keep the rate at this same level chosen since earlier in the year, surprise among analysts has been rife. What’s key here is that general speculation tended towards the Bank changing the rate further instead of holding it at the same level.

We now can see from recent reports released in October that discussion has been had between the Bank of England and a number of major firms. This discussion is a careful stage in interest rate adjustment wherein the Bank probes firms and their companies for a sense of their readiness to see interest rates adjusted. In this case, it was expected this would result in a negative rate in response to the pressures of the COVID-19 pandemic. 

So, what impact will this have? Will inflation fluctuate during the pandemic? What does that mean for the average working professional and their family?

Base Interest Rate: Why It’s So Important

In short, the level at which the Bank of England places our country’s base interest rate acts as a guiding tool for other companies and firms. It helps them to estimate how much money they can safely lend to customers and determines how much interest is paid on any accrued savings.

The decisive effect of a lowered base interest rate is that any savings individuals will grow more slowly than would otherwise be the case. There’s also a knock-on effect in other areas of our economy, such as the expectation of lowered interest rates on loans and more favorable mortgage rates. Borrowing, in short, is expected to become more affordable for consumers.

Covid-19: Interest Rates Plummet

To the surprise of nobody, the present pandemic has had a staggering impact on our economy. We have already seen the Bank of England slash its base interest rates twice in a small space of time, lowering from 0.75% all the way down to 0.25% earlier in the year. In as little as eight days after this occurred, the rate was further reduced down to 0.1%. It remains at this point in November. 

The Bank uses alterations to the base interest rate to stimulate growth and respond to any factors that are affecting the economy at present. In this way, the lowered interest rate has been hoped to help recover our struggling economy. Despite this effort, however, that economy continues to struggle and to be buffeted by uncertainty. More adults every day are being terminated from work after furloughs run out and unemployment figures are at a stunning high. By official terms, we have officially entered a financial recession since August of 2020.  

Is the Base Interest Rate Going To Go Negative?

The simple answer at present is that we don’t know. There is an expectation that this will occur, namely because of the aforementioned discussions between the Bank of England and the usual firms it polls and discusses interest rate adjustments with. Most recently, this discussion occurred in September and the subject of an adjustment to a negative rate was explicitly raised. 

The consequences of this are significant. For one, it may even mean that you would have to pay your very own Bank to hold your money in your account! Beyond this, it is a mixture of both good and bad. While our borrowing rates may become better and loans more affordable and obtainable for the average consumer, it would also likely mean high-performing savings accounts could be difficult to obtain. 

The Road Ahead

The Everyday Loans team wishes you well and hopes you have found this article helpful and informative.

One of the defining aspects of the current pandemic is the uncertainty of our situation as a country. We are unaware of the timeframe for vaccine creation and dispensing and the unique stressors placed on our economy may continue for some time. With so much of the function of the Bank of England and key lenders in the country resting on their ability to predict based on data and current trends, this abundance of the unknown has thrown the economy into turmoil.

With Brexit and the potential of a no-trade deal also looming on the horizon, hope now rests in part on fresh news of new vaccines and the admirable efforts of our scientists and healthcare professionals. With some experts pinning cautious hopes on a significant turnaround in our battle against infection rates as early as Spring of 2021, there is a modest hope for a return to something approaching normalcy in the months ahead. 

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