Investing jargon made simple: Interest rates

Interest is the cost of borrowing money or the reward for saving, in other words a percentage charged on the total amount you borrow or paid on the amount you save.

What you’ve been seeing in the news is the Bank of England base rate. The Bank of England sets this eight times a year, and uses it in its dealings with other financial institutions. It influences all the other interest rates in the economy, such as the lending and savings rates of high street banks.

The current rate is 0.75%. It is a rate of interest, so if you are paying back a loan such as a mortgage, you may have seen your repayments go up when the rate increased from 0.5% at the start of August. Being a rate of interest, it also works the other way, where if you’re a saver you may have seen your rate of return go up.

However, keep in mind that while interest rate rises usually get applied to mortgages straight away, rises aren’t always applied to savings accounts. Even if they are, these can be smaller, and could take longer. Remember, with inflation at 2.5% in July 2018, you need to have a savings interest rate higher than this or your money is losing spending power. That’s why you may want to consider investing in an account that could help you to do more with your money, such as a Stocks & Shares ISA.

The Bank of England raised the base rate from 0.5% to 0.75% at the start of August, only the second rise in over a decade. What does this mean for investors? It is a step towards ‘normality’, as the UK economy is showing some signs of strength and the squeeze on pay is easing. By raising the rate, the Bank of England aims to stop the economy from overheating. Gradual rate rises over time are likely, following what has been a long period of historic lows.

Stay subscribed to the True Potential Investor YouTube channel, where you’ll hear updates on things like interest rate rises and inflation in our weekly Money Round Up.