What is an Interest rate Cycle
You may here finance professionals refer to Interest Rate Cycles or related terms such as upward or downward cycles. An interest rate cycle is simply a description of the ways in which interest rates move; Interest rates will move in one direction, turn and then move in the other.
In practical terms this means if rates are going up, they will continue to go up until the Bank of England’s monetary policy committee have achieve the related goals.
Examples:
Please note these are greatly simplified and take into account no other economic controls.
To stimulate the economy (increase spending) the BoE may lower interest rates, this entices people to spend because of lower credit costs and save less as the dividends are not as good.
Equally, public spending could be too high and in a bid to reduce inflation, the BoE may begin to raise rates, making saving attractive and spending on credit expensive.
The BoE will continue to raise or lower rates until it lowers inflation or provides enough stimulation.
Obviously the BoE will be ensuring these changes do not adversely affect other Monetary Policies.
These process’ are incremental, the BoE will steadily change the rates, usually by 25 basis points (0.25%), until it has the right effect, they wont go and change it by a percent because, “the should get it going”, as such, the rates move in a cyclical fashion.
This is obviously important to mortgage borrowers as if we are on an upward cycle you would want to try and fix your rate and conversely if the rate is lowering you would be wise to use a tracker mortgage to track the mortgage down.
Is this what Changes my SVR?
The short answer is yes, but there is more to it than that. While your SVR or standard variable rate usually tracks the BoE Base Rate, it is up to the lenders discretion whether to raise or lower it in line with the BoE changes, if they change them at all!
It is not uncommon for the Bank of England to announce a rate rise of 25 basis points and your lender increases it by 30. Conversely, the BoE may lower rates by 25 basis points while you mortgage lender lowers them by only 20 basis points.
The bottom line is GET OFF THAT STANDARD VARIABLE RATE