How Interest Rates Affect Your Savings

Understanding Bank of England base rates and what they mean for your money and investments.

What Are Interest Rates?

Interest rates are the cost of borrowing money or the reward for saving it. The Bank of England sets the base rate, which influences all other rates in the economy – from savings accounts to mortgages. When the base rate goes up, saving becomes more attractive and borrowing more expensive.

Why Rates Change

The Bank of England adjusts interest rates to control inflation and stabilize the economy. When inflation is too high, they raise rates to cool spending and bring prices down. When the economy is weak, they lower rates to encourage spending and investment. The target inflation rate is 2%.

Effect on Savings Accounts

When the base rate rises, savings rates typically follow, though often with a lag. After years near zero, savings rates above 5% became available in 2023-24. Always check you're getting a competitive rate – banks are slow to pass on rate rises to existing customers.

Impact on Mortgages

Variable and tracker mortgages move with the base rate. Fixed-rate mortgages don't change during the fixed period, but new fixed rates reflect current base rate expectations. The dramatic rate rises in 2022-23 meant many homeowners faced significantly higher payments when their fixed deals ended.

How Rates Affect Bonds

Bonds and interest rates have an inverse relationship. When rates rise, existing bonds with lower coupons become less attractive, so their prices fall. When rates fall, existing bonds with higher coupons become more valuable.

Stock Market Effects

Higher interest rates can pressure stock prices in several ways. Companies pay more to borrow, reducing profits. Consumers have less disposable income due to higher mortgage and loan costs. Cash and bonds become more competitive, making stocks relatively less attractive.

Real Interest Rates Matter

A 5% savings rate sounds great, but if inflation is 7%, you're losing 2% in real terms. This is called the real interest rate – the nominal rate minus inflation. Always consider inflation when evaluating the attractiveness of cash savings.

Fixed vs Variable

For savings, fixed-term accounts lock in a rate but sacrifice access. Easy-access accounts offer flexibility but rates can fall. For borrowing, fixes provide payment certainty but you might miss out if rates fall. Your choice depends on your rate expectations and need for flexibility.

How We Can Help

At Harmond Capital, we help clients adapt their financial strategies as interest rates change. We'll review your savings to ensure competitive rates, adjust investment allocations appropriately, and help with mortgage planning.