Things may go up as well as down...

I am of course talking about interest rates, following today's increase by the Bank of England from 0.25% to 0.50%. A minor change some will say, and I'm largely inclined to agree, but a good many will underestimate the impact of such a small percentage increase, which is, in fact, a 100% increase in the base rate. Sensationalistic, I hear you say? Yes, that was my intention...

There will be lots of noise made today and in the coming days about a change of direction by the Monetary Policy Committee no doubt. However, let us not lose sight of where interest rates are, how long they've been there and where they have come from (thanks to www.economicshelp.org and the ONS for the attached graphic).

We have experienced record low levels of interest for an equal record level of time during a period of a record level of central bank input. In effect, what we have seen over the last 10 years has been artificial. It's been an economy on life support!

So, in essence, we should see this as a positive move, yes? Well, that's a much more difficult question. Largely interest rates are increasing due to inflation outstripping wage growth. As with all things, economics requires that things have an equal and opposite reaction. This increase is in effect a measured step on a path to ensuring that consumer prices don't rocket as a result of a lower sterling. Now, I'm no economist, and better minds than mine will articulate this in a far more accurate manner, but in short, the interest rate rise would appear to be a result of the negative economic news.

The impact of all of this, of course, depends on which side of the fence you sit. Those with hefty mortgages will lose out, whilst those with savings will stand to see some modest benefits.

Of the 8.1 million households with a mortgage, 3.7 million, or 46%, are on either a standard variable rate or a tracker rate, so less than half will be immediately affected. Even then, according to UK Finance, the average outstanding balance is £89,000 which would see payments increase by between £11 and £12 a month. So the initial impacts are minimal on household budgets. What should be of more concern is that this will not be the only increase, and one would expect to see steady rises over the next 2 to 3 years.

It is also important to note that the Bank estimates that almost 2 million mortgage holders have never experienced a rate rise. All of this is, of course, risible if you can remember the double-digit interest rates from the 70' and 80's. However, it's impact should not be underestimated with ever spiraling house prices and mortgage levels.

As for savers, well, we'll have to sit tight and see what the high street banks offer in way of increases. As usual, I'd expect them to lag behind in terms of both amount and timing in relation to mortgage rates.