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Navigating Rising Interest Rates

As the Bank of England raises the UK base interest rate to 5.25%, concerns about its implications on purchases and asset finance have become more prevalent. While the last time interest rates exceeded 5.25% was back in January 2008 when they reached 5.5%, the reasons for this recent increase primarily revolve around the goal of aligning inflation with a 2% target. In this blog post, we delve into the effects of interest rate hikes, focusing on the realm of asset finance and exploring the intricate relationship between interest rates and prices in markets like cars and commercial vehicles. 


The Complex Interplay of Interest Rates and Asset Prices 

Traditionally, one would expect that higher interest rates could potentially be offset by a decrease in asset prices. Unfortunately, this hasn't been the case, especially within the car market. Even as interest rates rise, consumers are not witnessing a corresponding reduction in car prices across the board. Similarly, while the housing market has experienced some decline only very recently, the correlation between increased rates and lowered prices remains indirect and gradual. 


Why Rates Aren’t Immediately Impacted by a BOE Rate Rise? 

When the Bank of England decides to increase interest rates, the immediate impact isn't always felt by consumers in the form of higher borrowing rates from banks. The intricate workings behind this involve something called swap rates. These rates reflect the cost of borrowing between financial institutions over a fixed period, which can range from a few months to several years. Lenders use these swap rates to anticipate the cost of their future borrowing and adjust their own interest rates accordingly.  

It's like a behind-the-scenes glimpse into the financial world. So, while the Bank of England's rate hikes might make headlines, the actual rates you encounter from banks depend on a variety of factors, including the lender's cost projections, risk assessments, and market competition. This means that immediate rate changes aren't always directly aligned with central bank decisions. Instead, the world of finance operates as a complex web where swap rates play a crucial role in determining the interest rates you eventually encounter when borrowing. 


Navigating the Car and Light Commercial Market 

Fleet of Aligned Commercial Vehicles Seen from Above

Data from the Auto Trader Retail Price Index highlights a contrasting scenario in the used car market. Prices have continued to rise, with the average second-hand car being over £4,000 more expensive than in April 2020. Although used car prices showed a 2.4% year-on-year increase to £17,920, the supply of cars under a year old has significantly increased by over 50%. This could potentially lead to a short-term softening of prices. It’s worth noting that some of this data is somewhat skewed however, due to the unique market during the pandemic. 

The demand for light commercial vehicles (LCV) in the UK continues to surge. In July, LCV registrations rose by 44.2%, marking the seventh consecutive month of growth. This robust demand has sustained used vehicle prices, which again, combining with the increased interest rates is driving up the cost of owning an LCV. 


3 Reasons a Business Can Be Optimistic:

Many businesses have expertly adapted their strategies to the shifting economic landscape, showcasing admirable resilience in the face of challenges. Exploring innovative financing options which may not have been considered before, can provide a dependable guide to navigate the world of business finance. 

The digital age has introduced transformative technologies that can enhance operational efficiencies. Utilising these digital tools and platforms can finely tune processes, reducing costs and counteracting the impact of rising interest rates.

Recognising the cyclical nature of interest rates is crucial. Businesses that endured recessions and tough economic times have emerged stronger, demonstrating the value of persistence. By maintaining a steadfast long-term perspective and focusing on holistic business growth strategies, companies can thrive in the ever-evolving landscape.

Strategies Amidst Rising Costs 


The underlying challenge for consumers lies in the thousands of pounds they're paying in added interest charges. The reality might dictate a need to re-evaluate their car budget, consider prolonging the use of their current vehicle, or explore refinancing options for balloon payments associated with PCP or Hire Purchase agreements.  


While the long-term projection of markets like used cars is influenced by a multitude of economic and political factors, what remains certain is the importance of making informed financial decisions. As we steer through uncertain waters, our goal at James Murray Finance is to provide you with a reliable compass, guiding you towards financial security and smart choices.  


Feel free to reach out to us for personalised advice and solutions tailored to your unique circumstances. 


Disclaimer: This blog post is intended for informational purposes only and does not constitute financial advice. All information is collated at time of writing and the best efforts have been made to ensure accuracy.  

About the author

James Murray

Meet James, the founder of James Murray Finance. With nearly two decades of industry experience and seven years dedicated to the finance sector, James has worked with a wide range of businesses, from startups to established enterprises. Read More >

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