What does an increase in interest rates mean?
In a recent development, the Bank of England announced that interest rates for lending will increase from 0.25% to 0.5%. This is the second time in three months that interest rates have increased. The rise is expected to fight the worrying levels of inflation as the cost of living is becoming a crisis for many.
This year, families faced one of the biggest decreases in their disposable income for three decades. The increase in inflation poses several problems, as the Bank of England strives to bring it down to its 2% target. As one can notice, combating inflation comes at a price of diluting the strength of spending power.
The increase in interest rates was an expected maneuver by economists following the high percentage in inflation recorded in December. This was spurred by increases in energy bills and the supply chain crisis impacting consumers and businesses on a global scale.
This hike in interest rates is to be expected across the medium term as increases of up to 1.5% are anticipated in 2023.
The current landscape within England is one where recruiting employees is hard, with numerous open job vacancies accompanied with increases in salaries. This has increased prices charged by businesses.
The increase in interest rates is expected to control the surge of prices and save low-income families from falling into poverty. On the other hand, the increased interest rates might price out buyers from acquiring property. In view of the consistent price increases for dwellings over the years, a low interest rate environment could enable first-time buyers to take on more debt. With this latest move, some first-time buyers will have lesser options to buy property. The higher interest rate environment can also eventually make things difficult for businesses with lower amounts of money being made available for loans.
In view of the fact that higher interest rates bring about lesser possibilities and appetite for loans, the economic growth can be expected to slow down over the coming months. This slowdown in economic activity can bring about increased rates in unemployment and reductions in GDP.
The move made in England can be something that will be adopted by other Central Banks within the world. These inflation levels are nothing like we have seen in the recent past and do not bode well for sustainability. A sustainable framework allows for consistent economic growth whereby inflation takes place in a controlled and predictable manner.