Low Interest Rates

Low Interest Rates

This graph shows how far interest rates have fallen since Jan 1990 when interest rates peaked at 15%.

One issue is that many banks have not passed the 0.5% base rates onto consumers. In fact banks have already started increasing the rate on fixed mortgages.

UK Interest Rates

However, with low interest rates it does effect many consumers

• Mortgage payments are relatively cheaper
• Saving is less attractive; those relying on saving incomes have been hit hard by the low rates.

However, the effect of low interest rates depends on

1. Inflation rates. If inflation is higher than interest rates, then the real interest rate is negative and so savers are definitely becoming worse off.
2. How long will interest rates stay low? This is the big question. Will inflationary pressure return causing rates to rise sharply. When firms are making decisions about investing, an important factor is certainty over future rates. Low interest rates may not encourage investment if there is uncertainty about the extent of future interest rate rises.
3. UK rates compared to Euro and US rates. If Euro rates and US fall to the same level as UK rates, the impact on Sterling will be muted. But, if Euro rates were much higher than UK rates then the Euro would remain relatively strong. However, signs are that Euro rates will not be rising anytime soon.