With the Bank of England base rate currently sitting at 5.25%, up from just 0.1% in 2020, it can seem like the cost of borrowing is now very expensive. Is it though? Are interest rates high at the moment? That depends on the timeframe you use for comparison. We’d argue that interest rates are still relatively low, historically. Let’s delve into the data.

Interest rates increased fast but have levelled off for now

The Bank of England chose not to hike interest rates for the first time since November 2021. This followed a rapid series of rate increases in an attempt to get inflation under control. The headline which much of the press ran with is, “interest rates still remain at the highest rate for 15 years”. That sounds bad and for anyone who borrowed heavily at lower rates, it certainly will cause a shock when they come to refinance the debt. However, the perception of whether interest rates are high changes significantly if we look at a longer timeframe.

Why were interest rates so low in the first place?

Before 2008, interest rates were quite routinely at the level of 5-7%, and interest rates in the early 1990s were as high as 15%. Now, if you’re a young thing, that probably seems like literally a lifetime ago. In reality, it was only between 15 and 30 years ago that interest rates were in the region of around 6%. They fluctuated regularly but only by around 2% either way.

So, what changed in 2008? We’ll, most of us remember something went wrong with interbank lending around that time and finance dried up. It was so bad, it became known as “The Financial Crisis”. We’ll not go into the ins and outs of what went wrong but the result for interest rates was a sudden and drastic cut to the base rate. This formed part of the Bank of England’s policy of Quantitative Easing. Creating cheap money out of thin air to avoid a catastrophic crash in the global economy.

Interest rates dropped from around 5% in 2008 to 0.5% and stayed that way for 13 years, fluctuating up and down by tiny amounts. They dropped as low as 0.1% during the pandemic of 2020 to 2022. This led to a huge amount of very cheap lending and multiple asset bubbles as a consequence. 

Naturally, such a low base rate is unsustainable. In 2022 several factors, including Putin’s shock invasion of Ukraine, forced the Bank of England to rapidly raise rates in a bid to curb increasing inflation.

Are interest rates high at the moment?

Here we are, in October 2023, with The Bank of England base rate held at 5.25%. Will this go up or will it go down? Things are far too volatile to predict that. So, are interest rates high at the moment? Well, what we can say is that 5.25% is a very reasonable base rate when looked at from the perspective of the last 15 – 30 years. If we look back further than that, it seems like a relatively low interest rate.

Is now a good time to borrow?

If you’ve been used to borrowing at the lower rates on offer between 2008 and 2022, prepare for a shock when you come to refinance your loans. This should be put into perspective by the historic base rate data. It’s still a great deal to borrow money right now.

If you’d like to access finance for your business, we’d be happy to explore the options open to you. Get in touch