Interest Rates Increases and the Effect on Finance

Along with almost everything at the moment, interest rates are increasing. One burning question is how will interest rate rises impact finance, both personally and in business? Below we explore some ways in which a higher interest rate may impact you.

What Are The Interest Rates Increases?

First, it’s important to look at why interest rates are increasing. The Government aims to get the rate of inflation to 2%, with the Bank of England setting the individual rate. Increasing interest rates allows the economy to decrease the rate of inflation and stop prices rising so fast.

On the 4th August 2022 interest rates increased to 1.75%.

Inflation is currently at an all time high due to higher energy prices and increased price of gas. Higher prices for the goods we buy from abroad have played a big role – there is a  higher demand for goods but suppliers are struggling to get hold of enough to meet demand. This has all led to businesses needing to charge higher prices due to the higher costs that they face.

Interest rates can impact the economy and stock markets, as borrowing becomes more expensive for individuals and businesses.

Higher Interest Rates and Mortgages

If you have a mortgage that charges a variable interest rate, the cost of your repayments may increase. This can in turn affect your ability to pay your mortgage, meaning it’s important to work out how your monthly repayments might be affected. You will usually see a price change for your mortgage payments within a month of the interest rates changing.

However, if you are on a fixed rate then you won’t see a change until the end of your fixed period.

Higher Interest Rates and the Stock Market

When a company is less profitable (higher expenses or less revenue), the amount of cash flow will drop, lowering the company’s stock. If a number of businesses experience decreases in their stock prices, the whole market will also decrease. Investors will not get as much growth from stock price per appreciation, making stock ownership less desirable.

Higher Interest Rates and Pensions

If you have a private pension and want to buy an annuity to provide an income in retirement, you may benefit from an increased interest rate. Annuity providers invest in government bonds – these are more expensive when the interest rates are low as there is a demand for them from investors. When interest rates rise, investors often sell their bonds, which in turn makes them cheaper. This means that annuity providers are now able to offer better returns.

It’s important to note that the state pension is not linked to the interest rates and is, therefore, unaffected.

If you need help with your business finances, we are chartered accountants in Swansea and we are here to help. We offer bookkeeping and accounting services to businesses nationwide, to help your business survive and grow. Contact our team now to see how we can help.