The recent increase in the Bank rate hopes to suppress demand by making saving more rewarding and borrowing more costly. We analyse the effect that changes in the Bank Rate have had on the interest charged on loans and offered to savers. The relationship between Bank Rate changes and changes to market rates is stronger for some products compared to others, meaning interest rates could face some trouble in controlling demand.

What does the chart show?

The red line indicates changes to the Bank Rate since January 2000. Use the filter on the right to interact with the chart and superimpose rates for fixed and variable rate mortgages, cash ISA deposits, instant access deposits, overdrafts, personal loans, and credit cards. For each of the categories listed, the chart displays the average rate of interest charged or offered in the month in question. All data has been gathered from the Bank of England. Data for cash ISAs and instant access saving accounts are only available from 2011.

Why is the chart interesting?

Thursday’s rate change came somewhat as a surprise, as the potential economic effects of the omicron variant remain unclear. Nonetheless, the Bank of England believed it had to act now in order to try and control inflationary pressure. The Bank Rate is a key tool for the Bank of England in doing so, and one channel it affects are market rates. It is hoped that raising the Bank Rate will translate into higher rates of interest on loans and savings accounts, encouraging people to save rather than spend, cooling down demand, and subsequently inflationary pressure. Crucial to these efforts is the translation of the increase in the Bank Rate to an increase in market rates. This week’s chart assesses the extent to which this has occurred in recent years.

As the chart displays, fixed and variable rate mortgages track the Bank Rate relatively well. Out of all forms of borrowing displayed, they are closest to the Bank Rate, and most correlated with changes in the Bank Rate. Despite this, whilst they tend to have risen proportionally with increases in the Bank Rate, when rates fell drastically, they have had a far steadier decrease.

Largely due to the greater risk involved in lending, the chart shows that representative credit cards, overdrafts, and personal loans charge far higher rates than the Bank Rate or mortgages. What is more interesting, however, is that the average rate of interest charged for these rose between the end of 2008 and 2009, while the Bank Rate tumbled from 4.5% to 0.5%. This disconnect is an important one, as it questions the extent to which the Bank of England can stimulate the economy by reducing the Bank Rate.

Whilst the spike in interest charged on overdrafts seems stark, it isn’t particularly relevant to this analysis. The sharp increase coincided with the FCA announcing reforms to the charging structures of overdrafts.

Savers may be pleased to see that for the data available, interest rates tend to follow changes in the Bank Rate quite well. This is simply a consolation, however, as instant access savings accounts were the only measure in the chart to stay below the Bank Rate for over a year.

The analysis above brings into question the extent to which the increase in the Bank Rate will have an impact on current inflationary pressure. Moving from 0.1% to 0.25% is unlikely to drastically encourage people to save or dissuade people from taking out loans. It is quite clear that 0.25% is not the destination, and we can expect further rises into 2022, meaning market rates will likely follow.

By David Dike

Posted by David Dike