FINANCIAL EDUCATION FOR YOUNG PEOPLE👨🎓👩🎓
Outline to Interest Rates, Inflation And The Rate Rises Of 2022 - All Explained Within 5min
What's Happening?
An interest rate is the cost of borrowing money or the reward for saving it with a bank. So for example, if you'd borrowed £10,000 at a 1% interest rate, you'd have to pay back £10,100.
In the UK, the Bank of England (BoE) sets the Bank Rate, which is currently set at 1.25%. However, with inflation at a 13 years high (currently 9.4%), it's nowhere close to the BOE's 2% inflation target.
To combat inflation, the BOE repeatedly increased the Bank Rate throughout 2022 to slow the prices of everyday essentials rising faster than average household incomes - which initially triggered the Cost of Living Crisis #COLC
Inflation Rate - Currently At 9.4%?
Why is inflation in the UK so high right now ?
Internally; housing and energy costs increased by a record 19.2% in the last 12 months
Externally; it's twofold; (1) energy prices increased due to disruptions to demand and supply for Russia's oil and gas; and (2) price shocks to Ukraine's reduced grain output worldwide
Three Reasons Why It Matters
💰SAVINGS ACCOUNTS; Higher interest rates eventually means higher returns for savings accounts compared to current rates – but this does not keep up with the level of inflation
💰COST OF LIVING CRISIS; Your purchasing power falls due to inflation, while the value of your savings drops. Therefore, the cost of living increases. For example, a few months ago the price of a 500g tub of Lurpak butter was £3.75, now, it's £5!
💰MORTGAGES; Borrowing becomes more expensive – with higher mortgages overtime as mortgage rates increase. Example, The Times (2022) explains that ‘a 0.25% rate hike would add £40 a month to a £300K mortgage with a 25 year term
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