The prospect of a small interest rate rise has people worried about the impact it will have on business. However, when the rate rises it will be a sign that the economy is strong enough to stand it, and after six years of the rate being at a record low it was always going to have to rise at some point.
Once this process starts it will continue as the economy continues to strengthen, and the Bank of England’s view seems to be that the ‘natural’ rate should be around the 2% figure, which is also the target for inflation. In reality banks have done better than business out of the low rate, and if farmers cast their minds back six or seven years they are probably not paying any less than they were then. Deals based on a percentage over base will become less attractive, but beyond that the impact of a marginally higher rate will not be felt by most businesses.
While the prospect of a small interest rate rise is making headlines, it has been claimed that financial inertia – which unlike the interest rate can be avoided – is costing us all £17 billion a year. High on the list of where we waste money is paying too much tax, which has been put at almost £5bn. This comes from failure to reclaim all tax due on pensions, not using tax-free savings allowances (ISAs) and poor financial planning to minimise inheritance tax.
Another £4bn is wasted by people failing to change mortgages to the best fixed term deals, sticking instead with the fixed rate deal they started with. There will be a scramble to lock into lower rates now, but deals are still available. While rates are about to rise returns on savings have been hopeless, and below even the 0.5% base rate. Despite knowing that, people stick with rates paying a few pence a year in interest, and even at low savings rates wasted almost £1bn a year doing so.
Move into something we all have to buy – insurance – and despite the highly advertised comparison sites we’re wasting a fortune by falling into the inertia trap. This is about not deselecting the option of automatic renewals. By failing to do so it’s estimated that people are throwing away a massive £3.5bn a year by letting new customers, or even those who simply query renewals, enjoy better deals. Research shows that 12 million car owners and 13m house owners fell into this trap last year.
In rural areas options to change energy suppliers are sometimes not as good as in towns and cities, but failure to change electricity and gas suppliers is costing £1.2bn a year.
With the euro weak, holidays in the eurozone seem cheap, but we’re all wasting money on currency conversions – an estimated £1.2bn a year. Buying currency at the airport is the most expensive way to do so, and money cards – the new version of travellers’ cheques – in a specific currency are cheaper than taking a transaction charge hit each time you use your credit card.
To this list of inertia losses can now be added staying with the same bank because we’ve always been with that bank. In the past loyalty was rewarded, but now it’s often abused, in that the best deals are kept for new customers. In a soulless banking era, with many branches closed, we really are just a number.
The process of moving banks has been streamlined, but figures show we still suffer from inertia and believe the process is more complicated than it is. As we move into an era of higher interest rates we might well finally be shaken out of that particular costly lethargy.