What does a US Fed rise mean for the UK? - Economy - News - Moneyfacts


What does a US Fed rise mean for the UK?

What does a US Fed rise mean for the UK?

Category: Economy

Updated: 17/12/2015
First Published: 17/12/2015

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

You may have come across the news that the US Federal Reserve has decided to raise interest rates, although you may not think that financial events happening in the US will have much of an impact on UK soil. However, the two are actually often closely linked, and we could soon feel the effects…

Optimistic economic picture

The Fed's decision brings US interest rates to 0.25%-0.50%, an increase of 25 basis points, marking the first time the rate has been increased since 2006. Essentially, this seems to suggest that the Fed is largely optimistic about America's economic growth, with the central bank being confident that households can absorb the rise in interest rates.

That's all well and good, but what does it mean for us? Well, as our finance expert Rachel Springall points out, "it's a sign to expect the Bank of England to raise interest rates in the near future". It may not be instantaneous but it's a likely consequence in the not-too-distant future, with the movements of both central banks being historically connected.

What does it mean for savers?

Savers may welcome the first interest rate rise, as base rate remaining so low certainly hasn't been doing the savings market any favours. Taking a look at historic figures highlights this in more detail: in December 2008, for example, base rate stood at 3% and the average easy access account paid 2.19% yearly, but today that rate stands at a pitiful 0.66% with base rate at its lowest ever level.

However, a hike to base rate doesn't necessarily mean that a rise in interest rates will follow. "Savers shouldn't get their hopes up too much," said Rachel, as "the link between base rate and savings rates today may no longer be very strong thanks to lending initiatives by the Government, which mean that mainstream providers don't need savers' deposits to fund their mortgage books."

The one exception to this is challenger bank. They still need savers' funds and are actively competing, and as a result, they're offering far better rates than their better-known counterparts. This trend is likely to continue, and as a result, we expect them to continue dominating the best buy charts well into 2016.

Borrowers – will you need to pay more?

At the other end of the scale, there's the clear likelihood that, should the Bank of England base rate follow the US fed rate, mortgage rates will similarly increase. "A subsequent rate rise in the UK could mean that those sitting on a Standard Variable Rate (SVR), or a variable or tracker mortgage rate, could see their monthly repayments soar, and we may even find lenders reduce the market by withdrawing deals," explained Rachel.

If you don't want to be faced with increased repayments, the best thing to do is fix to a low-cost mortgage deal while you still can. "Borrowers should remember that we currently have record low mortgage rates thanks to the Government's Funding for Lending Scheme, which means that there is great choice for people looking for a new deal," said Rachel, and it really could pay off: two-year fixed mortgage rates can be as low as 1.14%, while five-year rates can be found at 2.19%, so it's a great time to reconsider your options.

By acting now you could well find a cheaper and more cost-effective option before rates start to creep up, because although it may not happen instantly, it's bound to at some point. We're now in a hold-tight-and-see situation, so while we're stuck in this form of financial limbo, it's a great opportunity to review your finances so you can be prepared for rates to rise in the future – we'll just have to wait to find out when the change will be, and by how much rates will increase, but it doesn't hurt to be proactive in the meantime.

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Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.

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