US interest rates increased – what does it mean for Britain?


US interest rates increased – what does it mean for Britain?

The US Federal Reserve has voted to raise the country’s interest rates by 0.25 percentage points, the first increase since 2006. The increase means that borrowers in the US will start paying more for money they borrow, and they’ll also be able to earn more on the money they’re saving.

But does this change in the US interest rates mean that we should expect a similar increase in the UK base rate soon? Let’s take a look at what this news could mean for mortgage holders in Britain and when we could expect a change in the Bank of England (BoE) interest rate.

First change since 2006

US interest rates work in a slightly different way to the UK base rate as there’s a range of rates rather than one set base number. This recent move means that the range of rates that the US banks now offer when they lend to each other is between 0.25% and 0.5%. It represents the first time that the US Federal Reserve has increased interest rates since 2006, as they’ve been at near-zero since 2008.

There has been speculation that the US Federal Reserve would raise interest rates for months now and when the increase finally came, it was the result of a unanimous vote. That means that those in charge of the US interest rates are confident that the US economy is getting stronger and that inflation is returning - and that people can afford to repay loans, credit cards and – perhaps most importantly – mortgages at a higher rate.

UK interest rates

Although the US interest rate doesn’t affect UK borrowers directly, the US economy is traditionally used as a benchmark for the economy of the world as a whole. It’s thought that if the US is seeing a stronger economy and higher inflation, those in charge of setting the UK base rate could be tempted to follow suit too.

However, it’s probably not the case that the UK base rate will increase this month, or even next month. There’s a whole host of things to consider when the BoE sets the base rate – not least the state of the UK and European economy. In comparison to the US Federal Reserve, the European Central Bank recently cut its overnight deposit rates from -0.2% to -0.3%, showing it’s still being cautious about the state of the economy in Europe.

This could mean that the BoE will still be cautious about a change in the base rate until the economy of the world improves as a whole, including that of Europe. However, this latest change in the US interest rates could mean that we’re moving towards a time when the BoE will be confident enough to raise the base rate – so if you’re a homeowner, it’s worth keeping an eye out for when the rate looks likely to change. One thing’s for certain – rates in the UK will rise eventually!