What will Brexit do to interest rates?
What will Brexit do to interest rates? It’s one of the most commonly asked Brexit related questions on Google, so we thought we’d do our best to answer.
If you're not one of the keen interest rate Googlers, you may be wondering why this question really matters. Well, interest rates control how much the money you’ve saved or the money you’ve borrowed is worth, so when people ask Google what Brexit’s going to do to interest rates, they’re also asking what it’s going to do to their mortgage or the money they’re squirrelling away so they can maybe one day hope to have a mortgage.
And what about those of us who don’t have any savings to speak of, or a pension, or a mortgage? Interest rates are spoken about as though they’re a magic tap for the economy – they can control how much things cost, or how much businesses are investing in new jobs, which can affect us all.
Ok, let’s give this a go. What are interest rates?
Interest rates are how much you pay to borrow money, or how much you earn when you save (which is actually just lending money to the bank). When interest rates are high, it makes it more expensive to borrow, but it also makes your savings worth more.
Interest rates are controlled by the people who set the government’s money policies – – as a way of controlling the amount of money in the system. When things are tight, central banks want to encourage people to borrow a bit more, so they lower interest rates to make borrowing cheaper... which means they might spend a bit more. When people borrow money, they’re usually using it to invest in big things like a house or a new business. These investments bring money into the rest of the economy and can boost job growth or even wages.
But by raising interest rates, central banks make borrowing money a bit less attractive, and give people more of a reward for saving. In theory, that will stop people from spending so much, which can help ease inflation.
So how is Brexit going to affect these 'interest rates' you speak of?
Straight after the vote the Bank of England decided to lower interest rates, which it said would make people’s debts a bit cheaper, and encourage them to spend more.
According to the BBC, lowering the rate added up to the equivalent of £22 off an average monthly mortgage payment, and £25 less interest earned on £10,000 worth of savings.
In November this year, the bank decided to raise them again (just a little bit) and people are generally expecting interest rates to rise over the next few years.
That’s primarily because of . When the vote happened, people around the world were so worried about what was going to happen to the UK economy that they were less keen to invest in British pounds, so the pound's value dropped. That made it more expensive for UK companies to buy things from overseas, which made it more expensive when people tried to buy those things in the UK. That’s inflation.
In August, the deputy governor of the Bank of England, a guy called Ben Broadbent, said that rate rises would be the “new normal” as Brexit pushes up inflation. After the November rise, Mark Carney, the governor of the Bank, said that he’d need to do at least two more rises to bring inflation down to acceptable levels.
The bank’s hinting at more rises in the future which might bring inflation down, and might make your savings worth a bit more, but will also make anything you borrow more expensive. Long story short, as long as people keep freaking out about what Brexit’s going to do to the economy, they’ll keep freaking out about interest rates.
