Interest rate change: opportunity or setback?

by | Sep 13, 2016

Last month the Bank of England made the decision to cut interest rates for the first time since 2009. As part of a stimulus package for the UK economy following the Brexit decision, Governor Mark Carney announced that rates will be cut from a previous record low of 0.5% down to a new all-time low of 0.25% in this interest rate change.

This has had repercussions across the financial sector, with Santander being the first high street bank to announce that it will be changing the interest rates on its 123 bank account from 3% to 1.5%, effective as of 1 November. As the most popular current account in the UK, and with the possibility that other high street banks will follow suit, the impact is huge.

There are some lenders taking a different approach, including building society Nationwide (which has confirmed that it will rebuke the Bank of England’s decision, maintaining its interest rates for savers, but passing the cut onto those in debt). The instant reaction (including  the gut one from mainstream media), is that this decision will hit savers hard. There is no doubt that for some (especially those who rely on the interest from their savings as a source of income) the decision will be unwelcome, and will no doubt be particularly galling for those who were savvy enough to have shopped around for their savings account in the first place.

This is all assuming that you have any savings to begin with. There are two sides to every story, and those with few savings but with variable mortgages and other debts and loans stand to benefit from the cut, which will contribute to lower payback rates for period for which it remains.

As with any economic stimulus, it is important the decision is taken within context. The measure is one of four that has been designed to prevent an economic depression, the others being: a quantitative easing program (long-hand for printing money); a buy-up of corporate debt to drive down funding costs; and a £100bn Term Funding Scheme to allow high street banks to borrow a proportion of their outstanding lending at a 0.25% rate. It’s also important to remember that the rate change is not a first, won’t be the last, and that the cut itself is hardly astronomical. There are many other instances of more significant changes with more profound effects, such as the interest rate hike of the early 1990s which saw people paying up to 15% on their mortgages and other loans.

Arguably as an impact of all the recessions that lie behind us, lessons have been learned, not least by the Bank of England, which explains its insistence on keeping interest rates low (the recessions of the early 1980s and 1990s were both preceded by periods of high interest rates). History has taught  individuals to become more savvy with their  money and not to just trust high street banks and lenders to make their money work hard, but to take matters into their own hands instead.

Millennials in particular are in a unique position here. Their current predicament has been created by a market that they weren’t old enough to be involved with, but are suffering the consequences of this through high debt and a lack of property. As such, they’ve learned the hard way that, when it comes to their money, their destiny is in their hands and an interest rate change can affect this. Our research supports this, showing that more than 68% of millennials are worried about money management and unsure about the financial options open to them. It is critical for millennials to increase their financial understanding, particularly when it comes to investing. Our research has also shown that one way to encourage this is through making learning how to invest a fun activity, which is where we come in.

At invstr, our focus is on empowering everyone and making financial information freely available. We believe in the power of individuals over their finances and that, whatever the next few years hold from an economic perspective, those who take full charge stand a much better chance of prospering than those who sit back and simply watch the markets and the interest rate change.

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Risk Disclosure:
Invstr is a technology platform, not a registered broker-dealer or investment adviser. Invstr does not offer its own recommendations of any security or provide its own research to any user regarding any security transaction or order. Brokerage services, including fractional trading of US securities, are provided to Invstr users by DriveWealth LLC, a regulated member of FINRA/SIPC. DriveWealth may not establish investment accounts to residents of certain jurisdictions. For more information, including disclaimers, risk and transaction fees click here. Please note, investing involves risk and investments may lose value. Past performance does not guarantee future results.

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ALL RIGHTS RESERVED © INVSTR LTD. 2017

Risk Disclosure:

Invstr is a technology platform, not a registered broker-dealer or investment adviser. Invstr does not offer its own recommendations of any security or provide its own research to any user regarding any security transaction or order. Brokerage services, including fractional trading of US securities, are provided to Invstr users by DriveWealth LLC, a regulated member of FINRA/SIPC. DriveWealth may not establish investment accounts to residents of certain jurisdictions. For more information, including disclaimers, risk and transaction fees click here. Please note, investing involves risk and investments may lose value. Past performance does not guarantee future results.

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