What Happens When Interest Rates Rise?

During periods of financial and economic uncertainty, it’s natural to want to make the most of your money. However, without a solid understanding of how different types of accounts work to increase your savings, it can be difficult to know how to make the choice that’s right for you.

One area that some savers might be unsure about is interest and what it means when interest rates change. In order to help with this, this article will cover some key topics related to interest and interest rates, including:

• What Is Interest?
• Who Sets Interest Rates?
• How Often Do Interest Rates Change?
• Are Rising Interest Rates Good Or Bad For My Savings?

Understanding Interest Rates: What You Need To Know

What Are Interest Rates?

‘Interest’ is the amount of money that is earned whenever money is loaned.

If you have a mortgage or loan, over time you will be expected to pay back the full amount that you have borrowed, plus interest. This interest is the reward that the lender receives for lending money, and is how financial institutions like banks can afford to continue lending money out to consumers.

Similarly, if you keep savings in cash, then you are effectively ‘lending’ your bank access to this money, and you will receive interest on your savings.

When we talk about ‘interest rates’, we’re often referring to the ‘base rate’, which provides a standard rate of interest that will influence the rate that lenders can offer.

Although interest rates affect financial planning in a variety of ways, the core principle for understanding interest is simple: when interest rates are higher, borrowing costs more, and when interest rates are lower, borrowing costs less.

Who Sets Interest Rates?

In the UK, the interest ‘base rate’ is set by the Bank of England. The ‘base rate’ is the rate at which commercial financial institutions, like banks, building societies and friendly societies, can borrow money from the Bank of England. This affects how much these institutions charge in interest when their customers borrow from them.

How Often Do Interest Rates Change? 

The Bank of England changes interest rates about once every six weeks, which equates to around eight times a year.

Are Rising Interest Rates Good For My Savings?

The way rising interest rates affect savings is complicated and varies depending on the way you are saving.

For cash savings, like Cash ISAs, high interest rates are generally considered to be a good thing. This is because the higher the interest rates, the more money is paid in interest on cash savings.

When it comes to other types of investments, the impact of rising interest rates can be more complex.

The impact of increasing interest rates on invested money, like stocks and shares ISAs, can be mixed. Interest rates are often raised in response to inflation, which means that the cost of goods is increasing, which also increases a business’s profitability.

However, when interest rates rise, borrowing money becomes more expensive, which means that businesses have less money to keep growing. In this way, rising interest rates may be considered an indication that businesses are growing, but the actions taken to curb inflation might delay growth and development.

What Is The Target For Inflation?

The Bank of England maintains an inflation target of 2%. This target is set to ensure that the economy continues to grow, but does not grow so quickly that factors like wages and discretionary spending cannot keep up.

Discover A Range of Saving Products At Sheffield Mutual

At Sheffield Mutual, we provide a range of savings products to help our members achieve their goals.

Many of our plans, like our Regular Savings Plan, Investment Bond, Income Bond and Three Year Fixed Bond, provide a ‘sum assured’, which is a minimum guaranteed return on your investment, allowing our members to rest easy knowing that they will receive a minimum return whether interest rates go up or down.

Our range of products, including our Single Premium Investment ISA, Regular Premium Investment ISA, Tax Exempt Savings Plan, and Sustainable Investments, can help our customers develop long-term savings strategies.

In addition to our sum assured, many of our with-profits products are managed with a process called ‘smoothing’. Smoothing is the process of holding back some profits in years where performance is strong and using this excess to reduce fluctuations during difficult periods.

If you have any questions about our products or are interested in becoming a member of Sheffield Mutual, contact us, and a member of our team will be happy to answer any queries you may have.

This article provides generic information and the writer's opinions and should not be relied upon for investment decisions. Sheffield Mutual has provided no advice. If you doubt whether a savings or investment plan suits you, consider contacting a financial adviser for advice. If you do not have a financial adviser, you can get details of local financial advisers by visiting www.unbiased.co.uk or www.vouchedfor.co.uk. Advisers may charge for providing such advice and should confirm any costs beforehand.