Interest rates have been kept at 5.25% for this month, although there are still thoughts that rates will rise again in the next few months.
But how do interest rate changes affect the average person? I’ll explain in very simple terms:
When rates fall, there is less incentive for people to save their money – for example, banks drop the rate of interest they pay on some of their accounts. Also, borrowing becomes cheaper, so people take out more loans (including mortgages). All of this tends to equal more spending, which stimulates the economy.
Of course, the opposite tends to happen if there is a rise in the rates – people are more likely to save their money, because they should get more interest on it, and borrowing becomes more expensive, so people take out less loan and mortgages.
Both interest rate rises and falls play their part in maintaining a balanced economy. Of course, a change usually means that some people gain whilst others lose out, depending on your personal situation. The trick is to get yourself in a position whereby interest rate changes have the least effect (such as by fixing your mortgage rate) so that a change in the wrong direction doesn’t cause any nasty shocks.