Mark Carney, the Governor of the Bank of England, was this month forced to send a letter in addition to his Christmas cards.
While Mr Carney’s correspondence habits are rarely newsworthy, this particular letter prompted headlines because of who it was sent to – Chancellor Phillip Hammond – and its contents; an explanation of why inflation has reached its highest level for five-and-a-half years.
Inflation matters to Mr Carney because keeping it under control is part of his job description. But the implications of his letter go far beyond the City of London – they’re set to impact millions of Britons, not least anyone planning to buy a boat in 2018.
The reason is, the interest rates that determine the cost of borrowing, and saving for that matter, are inextricably linked to inflation.
The ability to set interest rates is the big stick the Bank of England typically uses as part of its mandate to keep inflation under control.
In November, the Bank of England raised interest rates for the first time in a decade. But with consumer prices still rising at 3.1 per cent a year – way over the Bank’s target of 2 per cent – there’s every chance it will have to act again in 2018 to restrict Britain’s runaway inflation.
So, the question is not if, but when interest rates will rise again. And given that rates are still at rock-bottom levels, perhaps the question should instead be how many times will they rise, and by how much?
Ripples across the boating world.
Clearly, existing boat owners who borrowed money to buy their vessel are set to be the first to feel the impact of an increase in interest rates. Anyone with a variable rate loan might see their monthly repayments increase each time the Bank of England notches up rates, while those with a fixed-rate loan will be insulated from the pain.
If you’re in the former category, it might be worth investigating if you can refinance to a fixed rate. There may be short-term costs involved, but it could save you money in the long-term.
For would-be boat buyers, the question is more nuanced. If you need a loan to fund your purchase, you need to decide what sort of finance you’re most comfortable with.
I like to think of the difference between variable and fixed-rate loans as being primarily a question of who takes the risk, and who benefits the most.
With a variable rate loan, you may get a slightly cheaper rate now, but you also run the risk of seeing your repayments increase whenever the Bank of England raises interest rates.
By contrast, with a fixed-rate loan it’s the lender who takes more of a risk, as they are tied into receiving the same repayments, even if interest rates rise for everyone else.
Britain’s economy may be in uncharted waters, but buying a boat needn’t be.
By rights, the Bank of England should have begun raising interest rates months ago, as inflation has remained stubbornly above target since February 2017. Yet Mark Carney and his rate-setting committee have held off on doing so for fear of accelerating Britain’s economic slowdown.
As 2018 dawns, the only certainty is that Britain faces a lot more Brexit uncertainty, and if inflation remains high, interest rates could rise again.
That needn’t end the dreams of aspiring boat buyers, but it does mean they should think carefully before they take the plunge – and that they should scan the horizon for finance providers beyond the typical banks.