Five reasons why the Bank of England’s interest rate rise is a good idea

Although a 0.25 per cent rise in the base interest rates to 0.5 per cent is unlikely to be felt by the average saver in the short-term, it could encourage us to save more over the longer run

Higher rates generally provide a bank with greater ammunition to trim rates if and when they need to (Reuters)

News that the Bank of England is raising interest rates for the first time since 2007 will be seen by many as an unwelcome additional cost at a time of stagnating wages, rising prices, sluggish economic growth and deep Brexit uncertainty.

But there are reasons to look favourably on the Bank of England’s decision. Here are five.

1. It stops us from becoming complacent

The Bank of England hasn’t raised interest rates since before the financial crisis and many people will have forgotten what it’s like to navigate rising interest rates.

Granted, Thursday’s move was well-telegraphed, but actually experiencing a rising cycle of interest rates is different to anticipating it. It’s important for investors and financial professionals to have experience of coping with more expensive borrowing rates, and it’s important for households and those with a mortgage to know what it’s like too.

Complacency can be very dangerous, especially in a market that’s steeped in so much uncertainty.

2. It might encourage us to save more

Although a 0.25 per cent rise in the base interest rates to 0.5 per cent is unlikely to be felt by the average saver in the short-term, it could encourage us to save more over the longer run. Record low rates for such a long period of time have meant that we’ve had little incentive to save, which can become a problem when the cost of living increases substantially.

While one incremental increase is not going to encourage us stash away large sums of cash, we might start to see the benefits of setting aside money with subsequent interest rate rises over the next two years.

3. It may prevent irresponsible borrowing

Likewise, the move might also help put a stop to what some experts have described as irresponsible borrowing.

Car loans and credit card borrowing have boomed in recent months and the Bank of England has in the past warned that UK lenders are underestimating their potential losses.

Even a small reminder of what it might be like for borrowing to be more costly, could encourage people to become more conscious of the risks involved.

4. It could support the pound

On Thursday, the pound slid against a slew of other currencies immediately after the rate hike announcement, but in the longer term interest rate hikes generally tend to support that country’s currency.

Higher interest rates don’t just encourage individuals and households domestically to save more, but they also tend to incentivise foreign investors to put their money in UK banks, because they will earn more interest.

The obvious caveat, however, is the deep uncertainty still surrounding Brexit. The pound has depreciated by well over 10 per cent against many other major currencies since June 2016’s Brexit vote and with so little clarity on what’s going to happen between now and March 2019, the vast majority of analysts and forecasters believe that a sustainable recovery in sterling is still a long way off.

5. It gives the Bank more ammunition to cut again if it needs to

And finally, cutting interest rates is a popular monetary policy tool used by central banks to stimulate the economy. If rates are already at or near a record low, the possibility to cut will be limited. Higher rates generally provide a bank with greater ammunition to trim rates if and when they need to.