- In 2023, households were better off on average as a result of higher interest rates
- Higher savings rates delivered an income boost while exposure to higher borrowing costs was limited
From an economic perspective, rate hikes are all about short-term pain for longer-term gain. When the Bank of England (BoE) raises the base rate, it feeds through to higher payments on mortgages and loans, leaving households with less to spend on other things. Higher interest rates also mean a higher return on savings, while would-be borrowers find it more expensive to take out a loan. This all makes it less attractive for firms and consumers to spend, cooling demand and dampening inflationary pressure.
The chart below shows how interest rates have changed since 1994, with the past few years representing the steepest hiking cycle in three decades. Usually, steeply rising interest rates would squeeze the economy by making households worse off. But this hasn’t been a normal cycle.