The news came through today that everyone had been expecting, the first UK interest rate rise in 10 years. However, it hardly came as a surprise did it?
Those with variable mortgages are probably worried as it looks like there will be a steady increase in interest rates for the upcoming months. Savings on the other hand will be rejoicing. Or will they?
It would seem the Bank of England's Monetary Policy Committee are worried about the impact of increasing inflation to the UK Economy and have increased interest rates in an attempt to combat this.
The current rate of inflation as measured by the Consumer Prices Index (CPI) is 3%. The Bank of England's target is 2%. So while savings may think this is a great move the reality is they were better off this time last year.
The current rate of interest is now 0.5% but CPI is 3%. This means that savers are in real terms 2.5% worse off compared with interest rates of 0.25% and CPI figures of 1% this time last year. The difference in real terms then was only 0.75% worse off. That's quite a dramatic increase. Inflation is bad news for savers, as it erodes the purchasing power of your money. Inflation is often referred to as the "The Silent Killer".
Savers should be looking at returns of at least 3% just to break even with their purchasing power.
So if you are a saver, it's unlikely today's news will be the news you're after.
The rise in base rates will produce both winners and losers. The winners will include 45 million savers, who are likely to see higher returns from savings accounts. A number of providers have already announced they will be increasing savings rates in line with the rise. Those planning on buying an annuity to finance their retirement will also benefit. But for at least four million households with variable rate mortgages, monthly payments are set to rise immediately. So how will you be affected?