Between 1971 and 2017 the average base interest rate in the UK has been 7.69%. When the international financial crisis gripped the UK in 2007, the Bank of England had recently lifted its base interest rate to 5.75%.
Later that year, with the financial crisis by then in full swing, interest rates were dropped back to 5.5%.
Within 2 years, in an attempt to kick-start the economy and drag it out of recession, rates were set at a record low of 0.5%.
That all-time low was subsequently reset at a mere 0.25%, where interest rates still sit today.
It’s now 10 years since the UK has seen an increase in the Bank of England’s base interest rate and something 8 million Brits have not experienced during their adult lives.
The Effects of Low Interest Rates
The infographic below takes a look at the impact that the last 10 years of falling interest rates has had on UK savers and borrowers:
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The Impact of Low Interest Rates on Borrowers
Borrowers have of course benefitted from 10 years of rock bottom interest rates.
Low interest rates are specifically intended to boost levels of borrowing with the idea that this money is subsequently injected back into the economy via increased spending.
Low mortgage, personal loan and credit card rates have all encouraged Brits to borrow more over the past decade.
The Impact of Low Interest Rates on Savers
There is of course a flip-side to low base rate of interest, which is that the interest rates available to savers have suffered.
With inflation recently running at 2.9% and the average savings account offering less than 1% in interest, holding cash savings means the purchasing power of that cash is reduced over time.
As a result, the level of savings held by the average UK resident has also hit an all-time low, which has thrown up some alarming statistics. Here are some of the key stats on how Britain’s savers have been affected:
Cash lost through lower interest rates and higher inflation is the annual equivalent to the average UK saver of a £125 each.
This sum would buy a trolley full of wine, 41 cups of takeaway coffee or 36 pints of lager.
Combined, the UK’s cash savings pot is losing the equivalent of £7.89 billion a year in purchasing power.
The reduced financial stimulus to saving that record low interest rates have resulted in means that 37% of UK-based adults would not be able to get through even one month without an income.
It is recommended as good financial housekeeping for individuals to have savings which amount to at least 90 days of ongoing expenses in the case of loss of income.
65% of a survey sample of 9000 people did not have sufficient savings to meet that advice.
Millennials and late-Millennials have particularly been discouraged from saving. One result of this is that those aged between 25 and 34 and living in rented accommodation are among the least financially resilient in the UK.
People who do not have the financial buffer of any savings are also more tempted to take out payday loans that come with sky high interest rates when hit by unexpected expenses.