The Governor of the Bank of England, Mark Carney, has given his strongest series of hints yet that interest rates could be on the rise, after nearly a decade of historical lows.  What does this mean for the average consumer and for businesses going forward, in an already unpredictable political and economic climate?

Mark Carney has been preparing us for a rise in interest rates through various public speeches in recent weeks.  When speaking to the International Monetary Fund in Washington, Carney hinted that whilst the impact of Brexit may not be fully felt for years to come, in the short term, it would likely mean a rise in interest rates and higher inflation and a weakening of the British economy.  He expanded on this at events marking 20 years of Bank of England independence, stating that this independence would help protect the UK from the consequences of Brexit by acting as a buffer between the ordinary consumer and rising prices.  He said “Monetary policy cannot prevent the weaker real incomes likely to accompany the move to new trading arrangements with the EU, but it can influence how this hit to incomes is distributed between job losses and price rises.”  These statements have led commentators to speculate that an interest rate rise is likely to happen as early as November 2017.  Carney himself has declared that any rise would “be at a gradual pace and to a limited extent” so speculation is rife that the rise would be by 0.25% to 0.5%.

How would such a rise affect consumers?

Obviously this rise in rates divides reaction between those who are borrowers and those who are savers.

Based on the Bank of England’s own figures, 43% of mortgage borrowers are on variable tracker type mortgages and so naturally, this means that many will see a rise in their monthly mortgage repayments. A rise of 0.25% would be a fairly modest amount over the course of a year and so would be in keeping with Carney’s statement that any rise would be gradual but borrowers need to ensure that they can absorb any differential in repayment amounts.  Carney knows that, despite the creeping rate of inflation and the need to keep that as close to the target 2% as possible, a sudden and dramatic rise in interest rates would be counterproductive in an economy where salaries are rising slower than the rate of inflation and so families are already feeling the squeeze on their budgets. Some mortgage borrowers are in the position where they have never known anything other than these historically low rates which have been enjoyed for the best part of a decade. This could also explain why the rate of those mortgage borrowers seeking to remortgage is at its highest since 2009 (according to UK Finance).

On the opposite end of the spectrum, savers would welcome any rise in the interest rates they are currently receiving on any deposits made at the bank.  Savers are said to outnumber borrowers by seven to one. As banks have been able to borrow money so cheaply from the central reserves, there has been no real need to vie for the affections and cash deposits of savers to conduct and maintain their business.  Some bank accounts offer very little by way of their interest rates and many savers are on fixed term arrangements and so any rise in central interest rates isn’t likely to make a massive difference to savers in the immediate term.

How would a rise affect businesses?

In the event of an interest rate rise, this would obviously lead to a pinch in a business’ cash flow if any debt repayments suddenly jump up.  Businesses should prepare for this by ensuring that any amounts owing to the business itself are quickly invoiced and followed up to avoid any and to allow the business to continue to pay its own creditors as debts fall due. Failure to do so satisfies the technical definition of insolvency found in the Insolvency Act 1986 which can in turn lead to unwanted consequences with existing creditors who may then have various Insolvency Act remedies at their disposal.

If a business is based in a more consumer facing or service type industry, then a hike in interest rates can lead to less demand for their services if households have less disposable income to spend.  Industries which are typically seen as “nice to have” such as retailers and entertainment are usually the first to feel the pinch.

Businesses should also consider how they might structure any new deals of financing requirements going forward.  As it seems likely that the trajectory now for interest rates is only upwards, any financing or borrowing which a business needs to do should ideally be on fixed rate terms to try and lock in the historically low rates available now, if at all possible. This could also be applicable to rent reviews for the business’ premises or any leasing arrangements for equipment needed for the business to continue.

Conclusion

As with all things related to the economy and the implications of Brexit, no one can fully predict the future.  However, the signs are all very much that interest rates will rise as early as 2 November when the Bank of England rate setting committee meet to discuss their next move.  Consumers and businesses should take stock now and think of ways to either protect themselves from any rise and any adverse affect it may have on their cash flows or conversely to enjoy the potential upsides from a rise in rates connected to cash deposits and savings they may hold.