Navigating UK Interest Rates: a Short Guide

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You may have heard a lot about UK interest rates in the media over the past year or so. Yet what does it all mean? Many headlines have warned of the potential harm to household finances that could result from repeated interest rate rises. However, the job of a financial planner is to help clients keep a cool head and maintain a steady course towards their long-term goals – navigating the immediate economic circumstances as best they can.

Below, our Norwich financial planners explain why the UK has experienced a repeated stream of interest rate increases. We discuss some key implications for your financial plan, offering some options moving forward. If you want to discuss your strategy with us, please get in touch to arrange a no-obligation financial consultation:

01603 789966
[email protected]


Why have interest rates gone up?

UK interest rates are controlled by the Bank of England (BoE). Between 2009 (the “end” of the Financial Crisis) and late 2021, interest rates were kept at historic lows under 1%. This was done partly to help keep government borrowing costs low. However, as the economy started reopening after COVID-19, the situation started to change.

Inflation was rising at a fast pace. For many years, inflation had been kept near the BoE’s target of 2%. Yet, in late 2021, it was increasing beyond this (partly due to international factors). Inflation was soon exacerbated by the conflict in Ukraine, leading to higher energy prices as Russia (a major oil producer) was sanctioned by the West and Ukrainian food exports suffered – driving up demand.

The BoE raised interest rates repeatedly to try and bring inflation under control. This happened fourteen times between December 2021 and the time of writing. Yet inflation broke into double digits, hitting 11.1% in October 2022, before gradually falling in 2023 (to 6.7% in October 2023). In theory, higher interest rates put a constraint on consumer spending, encouraging them to save more – thus dampening price rises across the economy.


What do higher interest rates mean for you?

Interest rates have a big impact on savings rates offered by UK banks and also mortgages. Higher interest rates can result in better returns on cash savings (e.g. new fixed-rate deals). However, UK banks have been heavily criticised for not sufficiently passing on the benefits of higher interest rates to savers. This is partly why the National Savings & Investments (NS&I) state-owned bank has recently launched its 6.2% Growth Bond, to try and pressure high street banks to improve their own deals (otherwise risking losing customers).

For homeowners, higher interest rates are largely bad news. Those on a fixed-rate deal should not be immediately affected (since monthly payments are stable until the product ends – e.g. in two years). However, those on a variable-rate mortgage are likely to see their monthly repayments go up as lenders increase their rates. Moreover, those on fixed-rate deals who are nearing the end of their product may also be facing far higher monthly repayments from new mortgage products compared to what they have been used to.

Renters can also suffer from interest rate rises. Although they do not hold a mortgage, their landlords often do. If their mortgage costs go up then these can be passed down to tenants as property owners seek to protect their profits.


Accounting for interest rates in your financial plan

Many homeowners were ignorant of the UK interest rate landscape before 2008-9, assuming that low interest rates would continue indefinitely. The last two years have been a painful wake-up call as many people come to the end of their fixed-rate deals.

Interest rates need to be accounted for in your financial plan in light of your unique goals and circumstances. If you are hoping to buy your first home, for instance, then interest rates may impact the timing of your decision to get onto the property ladder. For existing homeowners, higher interest rates can add more complexity to remortgaging.

It can help to seek financial advice to explore your options fully, with a more detached mind, taking into account the wider picture of your wealth and finances. As a general rule, it is a good idea to “stress test” your finances when taking out a new mortgage. For instance, could you still afford to make monthly repayments if interest rates go up in the future?

If you have cash savings, higher interest rates can open up opportunities to find better deals which could improve how much interest you earn. However, be mindful of the “interest rate trap” due to inadvertently breaching the Personal Savings Allowance. For a basic rate taxpayer, up to £1,000 tax-free interest can be earned each tax year (outside of an ISA). The threshold is £500 for someone on the higher rate.



If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:

01603 789966
[email protected]