Confused about interest rate increase

whitehartal

A quote, from the BoE website:
"So when we raise Bank Rate, banks will usually increase how much they charge on loans and the interest they offer on savings. This tends to discourage businesses from taking out loans to finance investment, and to encourage people to save rather than spend. As a result, there is less demand for goods and people spend less."

I get it, in theory, but.....

Let's say I want a new Jaguar, because everyone in the world seems to have one (remember the days when there were loads of Fiestas on the road? The "average car on the road" now seems to be either an E-Pavevor an Evoque!!!).

I'll borrow £50000 over 4 years, at 4%, a it'll cost me £1127 a month. 

"Oh no...the rate has gone to 4.25%..."

That same loan is going to cost me £1133 a month now. A WHOLE £6 a month...

Is that REALLY going to stop that purchase?

I'm wondering how many people really WILL curb their "unnecessary" spending?

Also...if mortgage rates rise, then yes - there will be a number of people who decide not to go ahead with a house purchase. Demand may reduce, and sellers may take their properties off the market, decide instead to stay where they are, and maybe refurbish, or extend (ironically - many will take out loans or put the cost on their credit cards...and there are plenty of 0% cards available!).In following years, as the population inevitably increases, there'll be more people wanting houses...demand will increase, and supply will be lower...so sellers will push the prices up...and we're back to square one!

When you've got companies like Shell and BP reporting record profits, and you have the British Gas CEO taking his £3.7m bonus on a £790k salary, are companies just taking the rip out of their customers now, "because they can"?

Do the BoE take into consideration "generational" and "societal" changes? This is more of a "me, me, me" society, where people "want" everything now, regardless of cost, or of "need"?

eskbanker

whitehartal said:

Do the BoE take into consideration "generational" and "societal" changes?

No - as has been discussed on various threads (mostly deleted), their primary remit is simply to achieve a Treasury-set target inflation rate of 2%, and the main lever they have is the base rate:

https://www.bankofengland.co.uk/monetary-policy/inflation

It's the Treasury's responsibility to adjust that target if they feel that wider issues should come into play, but the BoE focus is very narrow....

MX5huggy

No one is buying Jaguars anymore, even the iPace a car really ahead of the pack has lost its first mover advantage. 

Nebulous2

There was a lengthy thread yesterday which was deleted, so I don't know if this will last long. 

The effect of these increases is incremental, this one should not be seen alone, but as part of a bigger impact. 

There is a lot more interest in the savings forum now, with people chasing 4% interest rates, than there was over a year ago when 0.6% was good. 

I'm not keen on financing vehicles at all, but would have been much more interested at the 0% which was available pre-pandemic than the 7-8% which would be on offer now. 

I said on that other thread, I've been surprised at the resilience of the spending and don't know if my cutbacks put me in a minority. Going back to last summer I went to some tourist attractions and was surprised at how freely people were spending. I couldn't work out whether it was a last hurrah, being financed by debt or people who were not impacted by the cost of living crisis at all. 

That continues this year. A garden centre / restaurant in our area has just advertised their busiest ever day. I went to a restaurant for a modest family meal two weeks ago. We went early as some people with us were going to the theatre, and shortly after we arrived they started turning people away as they were full up. 

At the same time there are significant numbers of people struggling to get essentials, and many people with no financial cushion at all, living from payday to payday. 

I don't think I'm alone in not being able to interpret the signs...... 

poshrule_uk

Married couple and no children makes a big differences for us 

aaj123

I assume everyone is well aware that in real terms, the interest rate now is more negative than it ever was. In 2021, rates were 0.5% while inflation was around 2%. Now inflation is over 10% and we are gleefully talking of 4% rates.

poppystar

Nebulous2 said:

There was a lengthy thread yesterday which was deleted, so I don't know if this will last long. 

The effect of these increases is incremental, this one should not be seen alone, but as part of a bigger impact. 

There is a lot more interest in the savings forum now, with people chasing 4% interest rates, than there was over a year ago when 0.6% was good. 

I'm not keen on financing vehicles at all, but would have been much more interested at the 0% which was available pre-pandemic than the 7-8% which would be on offer now. 

I said on that other thread, I've been surprised at the resilience of the spending and don't know if my cutbacks put me in a minority. Going back to last summer I went to some tourist attractions and was surprised at how freely people were spending. I couldn't work out whether it was a last hurrah, being financed by debt or people who were not impacted by the cost of living crisis at all. 

That continues this year. A garden centre / restaurant in our area has just advertised their busiest ever day. I went to a restaurant for a modest family meal two weeks ago. We went early as some people with us were going to the theatre, and shortly after we arrived they started turning people away as they were full up. 

At the same time there are significant numbers of people struggling to get essentials, and many people with no financial cushion at all, living from payday to payday. 

I don't think I'm alone in not being able to interpret the signs...... 

I think that is the problem. Raising interest rates is far more likely to achieve the outcome where there is a scale from poor to rich. I’m seeing much the same as you - try getting into a restaurant without booking! With a more polarised society of haves and have nots I question how far interest rate rises can work as well - the poorer struggle far more but the richer have no or at least fewer problems and continue to spend, especially as they see rising prices as a reason to spend now rather than save for a more expensive future. Those who are in the middle then get pushed into either the have or have not camps dependent on whether they have mortgages or have savings. 

whitehartal

And I'm seeing the same Poppystar.

Last Thursday I went to a large retail park near Llantrisant in South Wales. I've been there many times over the last 20 years, but - apart from one Christmas Eve around 10 years ago - I've NEVER seen it so busy. There must be over 1000 parking spaces...all full - cars queuing onto the road outside...my wife and I said "Where's the cost of living crisis?"!!! This was around 2pm on a Thursday!!!

aaj123

whitehartal said:

And I'm seeing the same Poppystar.

Last Thursday I went to a large retail park near Llantrisant in South Wales. I've been there many times over the last 20 years, but - apart from one Christmas Eve around 10 years ago - I've NEVER seen it so busy. There must be over 1000 parking spaces...all full - cars queuing onto the road outside...my wife and I said "Where's the cost of living crisis?"!!! This was around 2pm on a Thursday!!!

Maybe the realisation that the money is better spent on goods now than have its purchasing power reduced by making it sit (even if using best buy savings accounts)?

eskbanker

aaj123 said:

I assume everyone is well aware that in real terms, the interest rate now is more negative than it ever was. In 2021, rates were 0.5% while inflation was around 2%. Now inflation is over 10% and we are gleefully talking of 4% rates.

Not sure there's really much glee about 4% rates, is there? Granted, the headline rates in the last few months have been better than for years before that, but it is frequently pointed out on here that net rates (i.e. relative to inflation, as you say) remain poor and that money in savings accounts will lose real terms value (as ever, but more pronounced now).

cwep2

The reality is that a 0.25% interest rate change is very small and on any individual thing, with the exception of a house purchase, makes a very limited difference. But the cumulative effect of 4% of rate hikes in 14 months does have a bigger impact on things. 

Car finance tends to be 2-4% above the base rate, so the monthly affordability of say a 3.5% APR loan vs 7.5% is significant.

Would agree that for many people this won't make much difference to behaviour, for many it will make a huge difference, but arguably cost of food/energy is bigger impact, but rate increases have a knock on effect to both mortgage rates and rental costs so it's a factor in the big monthly bills. The number of people for whom it does make things difficult and forces changes in behaviour though is growing, increasing inequality is not good for society.