The economy is slowing and but interest rates are rising, what next?

The British Economy fell by 0.3 percent in March, while the Bank of England raised its key rate to 4.5 per cent this week – and both have major implications for consumers.

Homeowners and borrowers face high borrowing costs, but it’s good news for savers and the UK has not slipped into recession.

The declining gross domestic product is being driven by the struggling services sector, according to the Office for National Statistics. Retailers are dealing with poor footfall due to bad weather and high inflation, which has put a dent in their sales.

The picture was slightly more positive for the three months to March 2023, when GDP grew by 0.1 percent.

Darren Morgan, ONS director of economic statistics, said in a snapshot: “Despite the launch of new license plates, car sales were low by historical standards – a continuation of the trend seen since the start of the pandemic – with storage, distribution and retail also a poor month.’

This is what it means for consumers – from homeowners to savers.

Higher mortgage and loan costs

The Bank of England raised the base rate from 4.25 percent to 4.5 percent to bring inflation under control.

Rising base rates mean it costs consumers more to borrow, from mortgages to loans.

This is because the base rate is one of the criteria that lenders use to set their prices.

Whether or not your mortgage or loan interest will go up as a result of this increase in the base rate depends on the type of deal you have.

Most tracker and floating rate loans move in line with the base rate. Fixed rate mortgages and loans will only change price at the end of their term.

Lenders claim that the cost of new fixed-rate mortgages is not directly linked to the base rate.

However, a rising base rate does mean rising swap rates – the level at which lenders lend to each other. And rising swap rates have a direct impact on the price of fixed rate home loans.

According to Moneyfacts, the average two-year fixed mortgage rate is now 5.26 percent, with a five-year fix at 4.97 percent. Around this time last year, those mortgage rates were 3.03 percent and 3.17 percent respectively.

Nearly three in five home loans due for renewal in 2023 have a rate of less than 2 percent, according to ONS statistics, well below current rates offered by lenders, despite the price drop since the beginning of the year.

But good news for savers

But successive interest rate hikes were good news for savers. Savings accounts now offer some of the highest interest rates on deposits in recent years.

The interest paid on many easily accessible deals increases along with the base rate.

Five savings providers have already announced they are raising easy-access rates following the Bank of England’s base rate hike.

Savers looking for new fixed-income bonds can also expect better rates, although those with existing bonds are stuck at their current interest rate levels.

Households are cutting back on spending

With GDP falling, households are cutting spending even further than they did because of the cost-of-living crisis.

Alice Haine, personal finance analyst at investment platform Bestinvest, said: “Declining output is worrying news for household finances as it indicates that the economy is not doing very well.

“Businesses and consumers are limiting spending in the face of so much uncertainty – something that could lead to wage freezes and job losses.”

Losing a job at a time when the prices of food, energy and household bills are also skyrocketing can decimate the finances of those who are not adequately prepared.

Recession avoided

As it stands, the UK has – narrowly – avoided entering a recession, defined as two consecutive quarters of declining GDP.

According to the Bank of England’s Monetary Policy Committee, the UK is likely to avoid a recession this year.

This is good news for consumers, because recessions normally lead to higher unemployment and falling house prices.

However, growth forecasts remain sluggish. The MPC expects the economy to grow by 0.25 percent this year, after a contraction of 0.5 percent was announced in February. GDP is also now expected to increase by 0.75 percent next year.