Interest rates are not what they used to be

By Roger Jackson on 

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How many times do we hear, “Interest rates are rubbish”, “They’re not what they used to be”?

Yes, it’s true. The Bank of England have interest rates at their lowest ever level since records began. However, we really must keep this in context.

The devil in disguise is inflation. Interest rates must be looked at in conjunction with inflation. Afterall, growth which is less than the rate of inflation means that your money is guaranteed to buy less for you every year where this happens.
So, when we compare the current rate of interest (0.1%) against the current rate of inflation, (0.6% announced 20/01/2021). It shows us that for every year this is the case, we’ll be 0.5% worse off.

Let’s illustrate that:

If I have £100 in my bank account today and a service on my car costs exactly £100. Then I can have a fair swap.
However, if we project this out for exactly 1 year and the my money in my bank account is earning 0.1%, then we know that my £100 will be worth £100.10 in a year.
That same service for my car will now have risen by around 0.6% and cost £100.60.
Therefore, my money, whilst still rising in numerical value, has gone down in “real” value. (It can’t buy me as much!)
For every year this goes on, my cash in the bank will be worth less.

Ok… We’re not talking about much difference in the example above, but keep this in mind moving forward with inflation on the rise (new figures show it’s rising) and interest rates projected to remain low. Also, if we’re talking about more money in the example above, the difference would be magnified.

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