How Interest Rates Have Shifted Since Brexit
The 2016 referendum decision for the UK to leave the European Union sparked considerable economic changes, and one of the most closely observed indicators has been the movement in interest rates. Initially, the Bank of England kept rates at historical lows to address economic uncertainties. However, recent years have seen a gradual increase in rates as the economic landscape has evolved.
This article reviews the journey of UK interest rates since Brexit, shedding light on the factors driving these changes and their impacts on homeowners, borrowers, and the economy as a whole.
Why Interest Rates Dropped After the Brexit Vote
In the wake of the Brexit referendum in June 2016, the Bank of England acted promptly to soften the anticipated economic impacts. With concerns over consumer confidence, potential reductions in investment, and a volatile pound, maintaining low interest rates was essential to foster economic stability. As a result, the Bank lowered rates to a historic low of 0.25% in August 2016, only months after the vote.
This low rate aimed to relieve pressure on borrowers—homeowners with mortgages and businesses seeking credit. The intent was to stimulate local investment and stave off a severe economic slowdown. While this approach proved stabilising for the economy, it came at a cost for savers, who saw reduced returns on their deposits. Many wondered how long such a low-rate environment would persist.
The Effects of Record-Low Interest Rates
At a rate of 0.25%, borrowing costs became more accessible for households and businesses alike. Many took advantage of this opportunity, whether through loans for home improvements, refinancing options, or other financial moves. However, there were drawbacks: savers earned minimal returns on savings accounts, and a spike in housing demand contributed to rising property prices.
By keeping rates low, the Bank of England encouraged consumer spending and investment, helping the UK transition through a period of economic uncertainty while navigating changes to trade relationships and regulations.
A Gradual Rate Increase: 2017 to 2019
Once the initial Brexit uncertainty settled, economic indicators showed signs of recovery, with a resurgence in consumer spending and investment. By 2017, the Bank of England signalled that an increase in interest rates was likely. In November 2017, the Bank made its first rate adjustment post-Brexit, increasing the rate from 0.25% to 0.5%. Although this was a cautious step, it marked the beginning of a move away from record lows.
The upward trend continued in 2018, with the base rate reaching 0.75% by August. These gradual increases balanced the need for economic support with growing inflationary pressures. For many homeowners, this period prompted a closer look at their mortgage terms, as higher rates often lead to increased monthly payments.
Why the Bank of England Raised Rates During This Period
These early rate hikes were largely a response to inflation. As economic conditions stabilised, inflation levels began to exceed the Bank’s target. By incrementally increasing rates, the Bank sought to curb inflation without jeopardising economic growth. Though these adjustments were modest, they signalled a cautious return to a more balanced interest rate environment.
The COVID-19 Pandemic: A Return to Low Rates
Just as interest rates appeared on an upward path, the COVID-19 pandemic struck, prompting the Bank of England to reverse course dramatically. In March 2020, the base rate was slashed to an unprecedented 0.1%—the lowest rate in UK history. This measure aimed to provide immediate financial relief as households and businesses faced the impact of lockdowns and economic uncertainty.
To further support the economy, the Bank implemented quantitative easing, injecting funds to stimulate activity. While these actions helped stabilise the economy, they also extended the period of exceptionally low interest rates, with housing demand and property prices rising as a result.
Consequences of Pandemic-Driven Low Rates
Borrowing remained exceptionally affordable during the pandemic, with homeowners taking advantage of low rates to remortgage and enhance their financial positions. Property demand surged as lifestyle changes led many to seek more spacious homes, further driving property prices upward.
The Resurgence of Rate Increases: 2021 to Today
As the UK economy began to recover post-pandemic, new pressures emerged, such as supply chain disruptions and rising energy costs, which pushed inflation to high levels. To combat this, the Bank of England resumed rate hikes in late 2021, and by 2023, the base rate had climbed above 4%.
These swift increases were necessary to tame inflation, yet they also posed challenges for homeowners with variable-rate mortgages, whose monthly payments rose with each adjustment. This high-rate environment also affected the affordability of new loans, underscoring the importance of choosing appropriate terms and repayment plans.
What Lies Ahead for UK Interest Rates?
The outlook for interest rates remains uncertain. While inflation appears to be stabilising, ongoing factors such as global supply chain disruptions and fluctuating energy prices continue to affect the economy. For now, it’s likely the Bank of England will keep its focus on managing inflation, meaning interest rates may remain elevated compared to the pre-pandemic period.
This current environment presents opportunities and challenges. Savers benefit from better returns on deposits, while borrowers may need to consider fixed-rate options to protect against potential rate hikes.
Impact of Rising Interest Rates on Homeowners and Borrowers
For homeowners, higher rates have a direct impact, particularly for those on variable-rate mortgages, whose monthly payments increase with each rate adjustment. This trend also affects prospective borrowers, as the cost of loans has risen significantly from the low-rate years.
Alternative Loan Options Amid Rising Rates
With interest rates climbing, homeowners considering financing options may look toward fixed-rate products for stable, predictable payments. Additionally, secured loans like home equity loans can offer affordable borrowing solutions in a high-rate market.
External Resources for More on Interest Rates
Essential Reading for Homeowners Seeking Finance
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